Mortgage-Backed Securities and the Financial Crisis of 2008: a Post Mortem

Transcription

1 Mortgage-Backed Securities and the Financial Crisis of 28: a Post Mortem Juan Ospina 1 Harald Uhlig 1 1 Department of Economics University of Chicago October 217

2 Outline

3 Post Mortem post mortem: an examination of a dead body to determine the cause of death.

4 What we do Questions: What were the losses and returns on non-agency RMBS, in particular those rated AAA? How did the ex-ante rating compare to their ex-post performance? Role of house price boom and bust for RMBS performance? Approach: Create new data set of 143 thousand RMBS bonds. Obtain their ratings, their characteristics, their payoff stream. Calculate losses, returns. Compare to ratings. Compare to house price booms and busts, state-by-state.

5 Data Collection We needed to find a source that had some information about the universe of securities Mortgage Market Statistical Annual 213 Edition had information on all non-agency MBS deals issued between 26 and 212 About 5 pages of tables deals.

6 A sample table from the Stats Annual

7 Data Collection on Bloomberg Searched for the 2824 deals from the Stats Annual Searched also for related deals (for example by name of financial institution) Deal Example Once we find a deal, we look back at all deals with similar name. Goal: get the universe of deals. Total: 8615 deals Old Deal Example For each deal, get tranches (securities, bonds) Total: bonds. Principal: 5.7 trillion $. Tranches Example Per bond: obtain 93 variables plus losses and cash flows Security Challenge: Bloomberg places a limit on how much information can be downloaded per month: Max out below 15 thousand securities per month. We have more than 14 thousand securities It took more than a year to collect all the data

8 Bloomberg Deal Search I Back

9 Bloomberg Deal Search II Back

10 Bloomberg List of Securities (Tranches) Back

11 Bloomberg Security Example Back

12 Data specs: ( Distr.:min, max, mean, 25th, 5th,75th ) Security Identification Cusip ID Deal Name Deal Manager Issuer Company Security Classification Deal Type (eg. CMBS, RMBS) Collateral Type (Home, Auto, Student) Collateral Type (ARM vs FRM) Agency Backed (yes, no) Agency (Fannie Mae, Freddie Mac) Dates Issue Date Pricing Date Maturity Date Security Description Bond type (e.g. Floater, i Only) Tranche Subordination Description Coupon Type (e.g. Fixed, Floating) Coupon Frequency (e.g. Monthly) Coupon Index Rate (e.g. 3M-libor) Credit Rating Current and Original Ratings (5 ag.) Other Security Characteristics Credit Support at Issuance Original Principal Amount Collateral Description Mortg.Purp.(% Equ. Takeout, Refin.) LTV Distr.. Credit Score Distr. Mortgage Size Distr. MBS metrics 1: w. av. coupon MBS metrics 2: w. av. Life MBS metrics 3:w. av. maturity Fraction of ARM and FRM Occup. (% own, inv., vac.) Geographic Information Fraction of mortg. in top 5 states Cash Flow and Losses Monthly Interest, Principal Paym. Monthly Outstanding balance Monthly Losses

13 What we find Seven facts: 1. The bulk of these securities was rated AAA. 2. AAA securities did ok: on average, their total cumulated losses up to 213 are under six percent. Their rate of return was above 2 percent. 3. The subprime AAA-rated RMBS did particularly well. 4. The bulk of the losses were concentrated on a small share of all securities. 5. Later vintages did worse than earlier vintages, but not subprime-aaa. 6. Mis-ratings modest for AAA. 7. Controlling for home price bust, a home price boom was good for repayments. Together, these facts call into question the conventional narrative, that improper ratings of RMBS were a major factor in the financial crisis of 28.

14 Fact 1: The bulk of these securities was rated AAA. MBS Bonds Principal Amount Rating No. Pct. ($ Billion) Pct. AAA 65, , AA 13, A 13, BBB 13, BB 6, B 3, CCC CC C Rated 115, , Not Rated 26,

15 Frequency Frequency Frequency FICO scores vs Prime, Alt-A, Subprime.25.2 Subprime Alt-A Prime Mean FICO Score Subprime Alt-A Prime Subprime Alt-A Prime Mean Mortgage Loan Size Mean LTV

16 Loss Rate Losses on AAA securities Fact 2: AAA securities did ok: on average, their total cumulated losses up to 213 are under six percent. Their rate of return was above 2 percent. Fact 3: The subprime AAA-rated RMBS did particularly well.7.6 Prime AltA Subprime All AAA % % 31.8% Time

17 Probability Loss Losses on all RMBS Panel A: Value-Weighted Loss as Fraction of Principal All Ratings AAA Investment Grade Ex-AAA Non-InvestmentGrade All Ratings AAA Investment Grade Ex-AAA Non-InvestmentGrade Panel B: Unweighted Probability of Loss Time

18 Loss ($ billion) Dollar Amount of Losses in Non-Agency RMBS All RMBS AAA-rated Inv. Grade Ex-AAA Non-Inv. Grade

19 Cash flow example Example Deal JPALT 26-S1 Security Name JPALT 26-S2 A7 Mtge Security ID 46627MEX1 Original Rating AAA Year Coupon Rate Interest Payments 1,421 2,131 2,131 2,18 1,989 1, Principal Payment ,247 1,365 1, Loss ,844 14,39 7,55 3,82 Balance 34,547 34,547 34,547 33,3 27,91 11,878 3,898 -

20 Returns 1 P = T t=1 i t + p t (1 + r) t + TV T (1 + r) T (1)

21 Returns 2 Return Statistic 8% TV 9% TV 1% TV By Credit Rating AAA AA A BBB Inv. Grade Ex AAA By Type of Mortgage AAA Prime AAA SubPrime AAA AltA

22 Returns 3 Return Statistic 8% TV 9% TV 1% TV Fixed Rate MBS AAA Prime Fixed AAA SubPrime Fixed AAA AltA Fixed Floating Rate MBS AAA Prime Floating AAA SubPrime Floating AAA AltA Floating

23 Frequency Fraction With Loss < 5% Fraction With Loss > 5% Fact 4: The bulk of the losses were concentrated on a small share of all securities..7.6 Panel A: All RMBS 1 Panel B: By Credit Rating AAA Loss < 5% IG Ex-AAA Loss < 5% Non-IG Loss < 5% AAA Investment Grade Ex-AAA Non-InvestmentGrade Loss as a Fraction of Principal Loss as a Fraction of Principal

24 Fact 5: Later vintages did worse than earlier vintages. Principal-Weighted Losses in RMBS and Credit Ratings: Rating Full Sample Before AAA.218***.2.34***.483*** AA.396***.1.118***.591*** A.362***.55***.2***.6572*** BBB.448***.334***.3152***.6655*** BB.4923***.653***.4886***.5136*** B.5812***.938***.6989***.5619*** CCC.736***.4125***.412***.9465*** CC.236*** *** C or Below.3863***.661***.667***.364*** Observations 93,92 19,23 38,381 36,291 R-squared Standard errors in parentheses p <.1, p <.5, p <.1

25 Vintage FE Vintage FE Vintage FE Fact 5: Vintage FE for Weighted Losses increased All RMBS Year of Issuance AAA AA A Year of Issuance BBB Year of Issuance

26 Vintage FE Vintage FE Vintage FE... though AAA-Subprime did not do worse over time Prime Alt-A Subprime All RMBS Year of Issuance AAA AA A BBB Year of Issuance Year of Issuance

27 Fact 6: Misratings Compare actual loss rate lossrate i,t = L i,t /Principal i,t to expected loss rate in table by Moody s.

28 Moody s Table

29 Fraction of Securities (%) Ex-Ante vs Ex-Post Rating Based on Moodys Ideal Table 9 8 Ex-Ante Rating Ex-Post Ideal Rating AAA AA A BBB BB B CCC CCC below Credit Rating Level

30 Fraction of Securities (%) Ex-Ante vs Ex-Post Rating: Unweighted 6 Ex-Ante Rating Ex-Post Ideal Rating AAA AA A BBB BB B CCC CCC below Credit Rating Level

31 Fraction of Securities (%) Ex-Ante vs Ex-Post Rating Based on Moodys Ideal Table 9 8 Correct Rating Inflated Rating Deflated Rating AAA AA A BBB BB B CCC CCC below Credit Rating Level

32 Misratings

33 Fact 7: Loss-Rates and House Price Boom/Busts lossrate i,t = β MA ω i,ma + β IL ω i,il β X X i + ɛ i where ω i,ma is the fraction of principal invested in the state MA, etc.. (with only five of these weights nonzero), and where X i are controls. lossrate i,t = = β boom (ω i,ma boom P MA + ω i,il boom P IL +...) + β bust (ω i,ma bust P MA + ω i,il bust P IL +...) where boom P MA is the percent change of house prices during the boom, 2-26, bust P MA is the percent change during the bust 26-29, etc..

34 State-Level Dummies for Loss Rates with Controls without Controls.3 / / / / / / / / / / -.4

35 State-Level House Price Boom and Bust Boom: 2-Q1 to 26-Q4 Bust: 26-Q4 to 29-Q4 23.2% / 38% 38% / 44.6% 44.6% / 72.1% 72.1% / 94.1% 94.1% / 165.2% -43.2% / -14.4% -14.4% / -9.6% -9.6% / -2.9% -2.9% /.2%.2% / 9.1%

36 House Prices and Loss Rates (1) (2) (3) (4) (5) HP *** -.218*** -.178*** (.3) (.1) (.12) HP *** -.63*** -.532*** (.6) (.21) (.2) Price Reversal -.238*** Controls No No No No Yes Observations 93,92 93,92 93,92 93,92 71,316 R-squared Standard errors in parentheses p <.1, p <.5, p <.1 Price Reversal = HP 26-29/ HP 2-26

37 House Prices and Loss Rates per Cohort, no controls HP 2-26: *** -.145*** -.183*** -.417*** (.5) (.4) (.5) (.1) (.24) (.31) (.31) HP 26-29: *** -.43*** -.665*** *** (.11) (.9) (.9) (.2) (.48) (.61) (.62) R N Standard errors in parentheses p <.1, p <.5, p <.1

38 House Prices and Loss Rates per Cohort, with controls HP *** -.29** -.67** -.151*** -.392*** (.6) (.6) (.6) (.11) (.29) (.21) (.29) HP ** -.42** -.286*** -.479*** -1.16*** (.11) (.1) (.9) (.18) (.42) (.37) (.51) AA ***.218***.676***.647*** A.17***.11***.7***.72***.47***.841***.514*** BBB.54***.51***.48***.163***.598***.834***.511*** BB.4***.35***.221***.378***.52***.536***.534*** B.51***.92***.351***.541***.878***.52***.875*** CCC...154**.269***.52***.98*.943*** CC *** Alt-A -.2* -..2**.1***.36***.64***.5*** Prime -.2* ***.17***.5 -.7* R N p <.1, p <.5, p <.1

39 Prices? Markit ABX-indices for Subprime RMBS AAA 12 AA Jan-6 Jan-8 Jan-1 Jan-12 Jan-14 Jan-6 Jan-8 Jan-1 Jan-12 Jan A 12 BBB Jan-6 Jan-8 Jan-1 Jan-12 Jan-14 Jan-6 Jan-8 Jan-1 Jan-12 Jan-14 ABX.HE indexes by Markit. Each line represents a vintage of subprime RMBS and the Index. Each panel shows the evolution of prices over time by credit rating. These indexes are constructed based on 2 deals.

40 Price Price... vs FINRA Survey 15 Investment Grade 1 Non-Investment Grade Weighted Mean 25th Pctile 75th Pctile Investment Grade Pre Investment Grade Summary statistics of daily transaction prices collected by the Financial Industry Regulatory Authority from May 211 through May 216 on Non-Agency MBS. Top: Investment Grade vs Non-Investment Grade. Bottom: vintages for Investment Grade. 22-day moving averages, principal weighted average and 25th and 75th percentiles.

41 Conclusions Seven facts: 1. The bulk of these securities was rated AAA. 2. AAA securities did ok: on average, their total cumulated losses up to 213 are under six percent. Their rate of return was above 2 percent. 3. The subprime AAA-rated RMBS did particularly well. 4. The bulk of the losses were concentrated on a small share of all securities. 5. Later vintages did worse than earlier vintages, but not subprime-aaa. 6. Mis-ratings modest for AAA. 7. Controlling for home price bust, a home price boom was good for repayments. Together, these facts call into question the conventional narrative, that improper ratings of RMBS were a major factor in the financial crisis of 28.