PIMCO Advisory s Approach to RMBS Valuation. December 8, 2010

Similar documents
S&P/Case-Shiller Home Price Indices

An Empirical Model of Subprime Mortgage Default from 2000 to 2007

S&P CORELOGIC CASE-SHILLER NATIONAL INDEX SETS 30-MONTH ANNUAL RETURN HIGH

New Developments in Housing Policy

LAS VEGAS LEADS PRICE GAINS IN JUNE ACCORDING TO S&P CORELOGIC CASE-SHILLER INDEX

PRESS RELEASE. Home Prices Continue Climbing in June 2013 According to the S&P/Case-Shiller Home Price Indices

S&P CORELOGIC CASE-SHILLER NATIONAL HOME PRICE NSA INDEX CONTINUES STEADY GAINS IN OCTOBER

BlackRock Solutions CMBS Credit Model

PRESS RELEASE. Home Price Gains Continue to Moderate According to the S&P/Case-Shiller Home Price Indices

Mortgage Market Monitor

CITIES IN THE WEST: SEATTLE, LAS VEGAS AND SAN FRANCISCO LEAD GAINS IN S&P CORELOGIC CASE-SHILLER HOME PRICE INDICES

Mortgage Market Monitor

Mortgage Market Monitor

SEPTEMBER S&P CORELOGIC CASE-SHILLER NATIONAL HOME PRICE NSA INDEX UP 6.2% IN LAST 12 MONTHS

S&P/Case-Shiller Home Price Indices

Mortgage Market Monitor

Pace of Decline in Home Prices Moderates as the First Quarter of 2012 Ends, According to the S&P/Case-Shiller Home Price Indices

Mortgage Market Monitor

Residential Mortgage Credit Model

Home Prices Extend Gains According to the S&P/Case-Shiller Home Price Indices

All Three Home Price Composites End 2011 at New Lows According to the S&P/Case-Shiller Home Price Indices

Mortgage Market Monitor

PRESS RELEASE. Widespread Slowdown in Home Price Gains According to the S&P/Case-Shiller Home Price Indices

State of the Banking Industry

Nationally, Home Prices Went Up in the Second Quarter of 2011 According to the S&P/Case-Shiller Home Price Indices

Real Estate Loan Losses, Bank Failure and Emerging Regulation 2010

Addendum to: The Community Reinvestment Act: A Welcome Anomaly in the Foreclosure Crisis

ZipRealty, Inc. Supplemental Data Reclassification of Consolidated Statement of Operations

The Housing Market and the Macroeconomy. Karl E. Case. University of North Carolina February 18, 2010

The U.S. and California Is The Recovery Here at Last? UCLA Anderson School of

NC Mortgage Trends Matthew Martin, Ph.D. Regional Economist Federal Reserve Bank of Richmond

Addendum to: The Community Reinvestment Act: A Welcome Anomaly in the Foreclosure Crisis

U.S. Subprime Rating Surveillance Update

Issue No. 80 July 2009

Discussion of: Can Securitization Work? Lessons from the U.S. REIT Market

Supplementary Results for Geographic Variation in Subprime Loan Features, Foreclosures and Prepayments. Morgan J. Rose. March 2011

MORTGAGE BACKED SECURITIES AN ACTUARIAL APPROACH TO CASH FLOW ANALYSIS

Loan Level Mortgage Modeling

Office of the Chief Economist National Credit Union Administration. Economic Overview. California State Examiner School.

Managing Your Money: "Housing and Public Policy the Bubble, Present, and Future

Investor Presentation. February 11, 2014

U.S. Private Label and European Residential Mortgage-Backed Securities

The Consequences of Mortgage Credit Expansion. What is the Nature of the Mortgage Default Crisis?

Europe June Carol Tomé Executive Vice President, Corporate Services & Chief Financial Officer. Diane Dayhoff Vice President, Investor Relations

Australia/Asia July Diane Dayhoff Vice President, Investor Relations. Lyndsey Burton Senior Manager, Investor Relations

State of the U.S. Multifamily Market. Q Review and Forecast

US Hotel Industry Overview. Chris Crenshaw

Structured Finance. U.S. RMBS Sustainable Home Price Report. First-Quarter 2017 Update Special Report RMBS / U.S.A.

Capital Market Update. February 10, 2011 Marc Louargand, Ph.D., CRE, FRICS Principal SALTASH PARTNERS LLC investing in American ingenuity

Subprime Bond Case Study Two Harbors Investment Corp. August 6, 2014

Investor Presentation. May 13, 2013

2007 Outlook for Southern California Housing

Understanding the Foreclosure Crisis in California

Structured Finance. U.S. RMBS Cash Flow Analysis Criteria. Residential Mortgage / U.S.A. Sector-Specific Criteria. Scope. Key Rating Drivers

U.S. and New England Economic Conditions and Outlook

prepayment models (MBS & ABS Prepayment Model, Custom Prepayment Model) burnout, turnover and seasonality. credit models

State Of The U.S. Industrial Market: 2017 Q2

STATE OF THE REAL ESTATE MARKET FALL Robert J. Strachota MAI, MCBA, CRE, FIBA 35 th Annual Real Estate Institute November 2, 2017 CLE

Home prices, remittance reports, prepayments. Mortgage data is all around us. But to

Mortgage Delinquencies and Foreclosures: Hawaii

WA S H I N G TO N / BALT I M O R E

Struggling to Escape the Fallout of the Great Recession MARISA Di NATALE, MANAGING DIRECTOR

The Current Real Estate Finance Climate

Housing Recovery is Underway, But Not for Everyone

Quantitative and Qualitative Disclosures about Market Risk.

Metropolitan Area Statistics (4Q 2012)

Are you prepared? FASB s CECL Model for Impairment Demystifying the Proposed Standard

SAVE THE DATE! 22nd Annual CFO Council Conference The Disneyland Hotel Anaheim, CA May 15 18, 2016

Quantitative Perspectives

Denver Subprime Loan Report

Credit Modeling, CECL, Concentration, and Capital Stress Testing

How the Proposed Current Expected Credit Loss (CECL) Rule Will Affect your Allowance for Loan and Lease Losses

Was it all for N 0 u g h t? The 00 Decade and the Year Ahead. Tony Pierson Cornerstone Real Estate Advisers LLC. Real Estate Conference

Regional Snapshot: The Cost of Living in Metro Atlanta

AEI Center on Housing Markets and Finance Announces Ten Best and Worst Metro Areas to Be a First Time Homebuyer

Making Home Affordable Base Net Present Value (NPV) Model (v5.02) Training Module for Servicers

Captain CREDIT Crunch

ALI-ABA VIDEO SEMINAR. Handling Commercial Real Estate Defaults: Workouts. April 28, 2009 Live Video Seminar/Webcast

The Economic Backdrop When will this cycle end?

Beryl Credit Pulse on Structured Finance

COLLATERALIZED LOAN OBLIGATIONS (CLO) Dr. Janne Gustafsson

Discussion: The Mortgage Meltdown Implications for Credit Availability. Eric S. Rosengren, President and CEO, Federal Reserve Bank of Boston

Mortgage-Backed Securities

Back to the Future? Housing and Mortgage Finance in a Government World

Identifying Issues in the Subprime Mortgage Market: North San Joaquin Valley

COMMERCIAL REAL ESTATE PRICES MIXED: GENERAL COMMERCIAL SECTOR GAINS MOMENTUM WHILE INVESTMENT GRADE SEES SEASONAL DIP

The Five Retail Trends to Watch in January 14, 2015

Identifying Issues in the Subprime Mortgage Market: The Bay Area

Hayne Leland Professor of the Graduate School, Haas School of Business, UC Berkeley Principal, Home Equity Securities (HES)

Fourth Quarter 2014 Financial Results Supplement

Market Risk Disclosures For the Quarter Ended March 31, 2013

Market Risk Disclosures For the Quarterly Period Ended September 30, 2014

Making Home Affordable Base Net Present Value (NPV) Model (v5.02) Training Module for Servicers

First Quarter 2017 Earnings Call MAY 4, 2017

Credit Access and Consumer Protection: Searching for the Right Balance

Residential Real Estate Review: 2017

Commentary: Understanding Recent Trends in House Prices and Homeownership

ERRATA. To: Recipients of MG-388-RC, Estimating Terrorism Risk, RAND Corporation Publications Department. Date: December 2005

Commercial Consumerism. Jeffrey Gundlach Chief Executive Officer Chief Investment Officer

FOR IMMEDIATE RELEASE Contact: Ann Marie Gorden/Robert Nihen

Transcription:

PIMCO Advisory s Approach to RMBS Valuation December 8, 2010 0

The reports contain modeling based on hypothetical information which has been provided for informational purposes only. No representation is being made that results similar to those shown may be achieved. Past performance is not a guarantee or a reliable indicator of future results. This report has been created to satisfy our contractual agreement with you and should not be construed as an offer or solicitation of investment advisory services. All investments are subject to risk and may lose value. This material contains the current opinions of the manager (as of December 2010) and such opinions are subject to change without notice. Charts, graphs, and securities referenced herein are not indicative of the past or future performance of any PIMCO product. PIMCO may or may not own the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. 2010, PIMCO. 1

The Building Blocks of Valuation Credit sensitive mortgages are very complex assets and there is no simple way to determine their expected losses with certainty Mortgage models are effectively making a forecast about the future, e.g., what path will home prices take over the next 30 years Models aren t perfect and are rough approximate of expected future behavior Valuation of RMBS requires a combination of quantitative modeling and fundamental understanding of mortgage markets Effective use of models requires substantial judgment on the part of the modeler and end-user. PIMCO Advisory s mortgage modeling process is the result of decades of experience & a deep fundamental understanding of the underlying assets Macroeconomic Model Mortgage Loan Credit Model Waterfall Model Valuation Projects macroeconomic variables which drive the Mortgage Loan Credit Model For example: HPA, Interest rates Projects the performance of each loan based on macroeconomic scenario and loan characteristics Uses the results of the Credit Model to determine the impact on the tranches in the deal Once cash-flow results are generated, they are discounted by an assumed interest rate to arrive at NPV 2

National House Price Situation As Of September 30, 2010 Case-Shiller HPI 20-City Composite YoY MoM Peak Peak to Peak to Current Previous Current Previous Month Current Trough 0.5% 1.6% -0.8% -0.5% Apr-06-29.6% -31.8% House Price Apprec iation YoY 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% C ase-shiller HPI: 20 C ity C omposite 01 02 03 04 05 06 07 08 09 10 SOURCE: S&P, Haver Analytics 3

Significant Variation Exists Across Local Housing Markets As Of September 30, 2010 Case-Shiller Peak to Trough HPD & Rebound (In Parantheses) - MSAs Las Vegas Phoenix Miami Detroit San Francisco Tampa San Diego Los Angeles Minneapolis Washington D.C. Chicago Seattle Atlanta Portland New York Cleveland Boston Charlotte Denver Dallas -57% (0.3%) -54.5% (3.5%) -48.5% (0.7%) -46.7% (4.3%) -46.1% (20.2%) -42.7% (0%) -42.3% (12.5%) -41.9% (10.2%) -36.5% (13.9%) -33.9% (13.8%) -29% (4.2%) -25.3% (1.1%) -24% (3.9%) -23% (0.5%) -21.7% (3.4%) -21.6% (7.1%) -20.1% (7.2%) -15.5% (0.5%) -14.3% (5.9%) -11.2% (4.7%) 0% -10% -20% -30% -40% -50% -60% SOURCE: S&P, Haver Analytics 4

Interest Rate Paths Future interest rate paths are usually based on implied forward money market and mortgage interest rates Interest rates impact the collateral cashflows. In particular the projected interest rates impact refinanceability of the loans as well as any borrower payment shock 8 7 6 5 4 3 2 1 0 2010 2011 2012 2013 2014 Interest Rates (%) 2015 2016 2017 2018 2019 2020 1M LIBOR 6M LIBOR 1Y LIBOR 1Y TSY PRIME 1Y MTA SOURCE: PIMCO The dates projected are a forecast along forwards made by PIMCO. 5

Mortgage Loan Credit Model The role of a mortgage loan credit model is to project mortgage default, prepay and loss severity on a loan basis and by extension on a mortgage-backed security PIMCO Advisory s loss expectations are determined by employing proprietary loan level quantitative models The proprietary loan-level default model has the following three major components: Incorporates borrower and property characteristics based on attributes known at the time of origination Includes dynamic performance data from origination including borrower payment, interest rates, and home price histories Incorporates future economic information on regional home-price appreciation and mortgage/interest rates We employ different sub-models by credit (subprime, Alt-A etc.) and product type (fixed vs. adjustable) The output of the model is a set of CPR, CDR and severity vectors 6

Loan-Level Default Analysis PIMCO Advisory s loan level process models each individual loan in each securitization Historical loan performance is a critical factor in projecting future performance In our model, loans are classified into two groups: performing and non-performing The model incorporates not only the current status but also considers the previous history of the loan; if a loan was previously delinquent, the probability of future default increases Based on the loan level characteristics and macro economic variables, transition probabilities are calculated, a random drawing against these calculated probabilities decides which performance group or exit group (prepayment or default) the loan goes during the next month Since the parameters of the model are path-dependent, Monte-Carlo simulation is used After updating all the information, a new set of probabilities is calculated, a new drawing is performed for the next month. This procedure repeats until the loan prepays or defaults. The loan level prediction is then aggregated into CPR/CDR vectors 7

Important Explanatory Factors of Credit Model Static Factors Original borrower FICO Documentation level Property type (single unit, condo, two-four unit etc.) Occupancy (owner, investor/second homes) Dynamic Factors Current marked-to-market loan-to-value ratio; Current LTV is adjusted using regional home price indices. Interest rates: impacts prepayment speeds and payment shock behavior Home price appreciation / depreciation (HPA / HPD) Seasoning / Loan age Regional foreclosure timelines Historical Payment Information Duration of delinquency Fraction of time in delinquency Finally our expert analysts manually calibrate the model for a variety of reasons, including but not limited to: Inherent model biases Loan modifications Servicer-level adjustments 8

Illustrative Path-Dependent Simulation Current Month + 1 Month + 2 Months 92% Current Each loan is modeled individually over time Historic data tells us whether loan is current or delinquent as of today Loans may transition between current and delinquent states, and can terminate through prepayment or default 92% Current 5% 2% 1% 25% Delinquent Prepaid Defaulted Current Transition probabilities are a function of static, dynamic or path-dependent variables 5% Delinquent 50% 5% Delinquent Prepaid Current 20% Defaulted 2% Prepaid 1% Defaulted Historic Projected Sample for illustrative purposes only. 9

Loss Severity Analysis For the purposes of loss severity, the same default probabilities are applied to maintain consistency. Additional components that contribute to the ultimate loss severity analysis include: Collateral deficiency (unpaid balance less REO sales price) Lost interest (accrued as servicer advances) Expenses (legal, property taxes, brokerage fees) Mortgage insurance considerations The explanatory variables incorporated in the default probability have a linear relationship with loss severity. Historical trends can help predict loss severity sensitivities to inputs such as: Static Factors (at origination) - FICO - Property type - Occupancy (owner, investor/second) - Lien-Position - Mortgage Insurance - Judicial vs. non-judicial state Dynamic Factors - Interest-rate - Loan Balance - HPA/HPD - Current marked-to-market LTV - Regional Foreclosure Timelines - Time/Loan Age 10

Sample Adjustment: Accounting For Loan Modifications Loan Mod Data Loan Tapes PIMCO s Loan Mod Identification Algorithm + Modified Loan Repository Including: Modification type Rate Recap Rate Freeze Principal Forgiveness Modification date Modification magnitude Loan-level Loan-level Loan Mod CF Overrides -Prevents modified ARM loans from resetting -Assuming HAMP mods, lifts WAC to PMMS rate 5y after modification date Redefault Timing Adjustment -Multiplier of model CDR for modified loans - Based on empirical redefault timing for modifications categorized as: 1) those with principal reduction 2) those with payment reduction but no principal reduction 3) other types of modification Loan-level Loan-level Cashflow Engine Model Curves 11

Model Curves are Input into the Cash-flow Engine and Allocated According to Each Deal s Waterfall Structure Principal Allocation Group 1 Group 2 A2D K A1A A2A A1B A2B A1C A2C A2D K M1 M2 M3 M4 M5 M6 B1 B2 B3 B4 B5 Sample Subprime Tranche AF2 SOURCE: PIMCO Sample for illustrative purposes only Bonds get paid principal and interest and losses at a particular point in time The deal s legal documents determine the waterfall rules Loss Allocation Group 1 Group 2 AV1 (37.25%) i AF1 (0.00%) i AF2 (37.25% i AF3 (37.25%) i (37.25%) ik AF4 M1 (25.67%) M2 (14.76%) M3 (8.12%) M4 (1.99%) M5 (0.00%) M6 (0.00%) B1 (0.00%) B2 (0.00%) B3 (0.00%) B4 (0.00%) B5 (0.00%) 12