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Inside MBS & ABS

March 10, 2006

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Banks Shift MBS Holdings Toward Non-Agency Deals, Take Smaller Position in 4th Quarter

Commercial banks continued to edge away from the mortgage-securities market in the final months of 2005, allowing their agency MBS holdings to shrink slightly, according to a new analysis of call report data by Inside MBS & ABS. Commercial banks held a total of $897.14 billion of securities backed by single-family mortgages at the end of 2005, a decline of 0.6 percent from the previous quarter. For the year, bank MBS holdings grew a modest… [Two data tables included] Read More

Appraisal Quality Is a Big Problem, But MBS Ratings Remain Sound

The clamor over potentially inflated appraisals in a cooling housing market may have reached a fever pitch in the past six months, but the specter of tainted loans has not undercut the quality of mortgage-backed securities. Bad appraisals are always a concern, but especially so in areas where home prices have risen rapidly and you can see some degree of appraiser bias toward higher valuations, said Fitch analyst Glenn Costello. But the rating service… Read More

Some Simulated Rate Paths Drive OAS, Study Finds, Cash-Flow Assumptions Crucial in Option Valuation

Sustained high interest rates and long, average lives of cash flows with high-spread durations have a disproportionate impact on option adjusted spreads, than do declining rate, low average life paths with low spread durations, according to a new Bear Stearns analysis of mortgage OAS. Even modest changes to cash flows in a high interest rate climate can dramatically alter OAS valuations, and investors are advised to pay attention to model assumptions in a high-rate… Read More

An Alternative ‘Core Earnings’ Measure Could Have Saved Fannie Mae from its Current Accounting Woes

Fannie Mae would have tolerated more volatility in earnings – and avoided the accounting mess it’s in – had it known in advance how readily the market would accept the company’s “core earnings” in lieu of a more volatile GAAP measure, a new report on the government-sponsored enterprise’s accounting scandal has revealed. … Read More

Ratings Agency Missing the Boat on Some Alternative Mortgage Products, Investors and Traders Suggest

Are MBS ratings experts getting it right when it comes to setting enhancement levels and trigger mechanisms for alternative mortgage pools and home-equity loan deals? The ratings services think so. But some bond traders, investors and loan traders say otherwise. Various industry participants complain that the rating agencies were taking too hard a line on products ranging from high loan-to-value mortgages to option ARMs. “In general, the rating agencies have a tough job,” noted… Read More

Finance Board Proposal on Retained Earnings Could Prompt Cuts in FHLBanks’ MBS Holdings

The 12 Federal Home Loan Banks, a group that currently holds more than $100 billion in MBS, may be driven to shrink their holdings under a rule proposed this week by their regulator, the Federal Housing Finance Board. The FHFB proposal would restrict the amount of excess, or voluntary, stock that an FHLBank can accumulate and keep outstanding, and would establish a required minimum level of retained earnings for each institution. Under the proposal, excess… Read More

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