More Sub-Prime!

Gee, the last one was so much fun I think I’ll do another! Let’s look at “Bear Stearns Asset Backed Securities Trust 2005-1”.

On August 24, S&P released the following:

Standard & Poor’s Ratings Services today lowered its ratings on seven classes from Bear Stearns Asset Backed Securities Trust’s series 2001-3, 2005-1, 2005-2 and 2005-3 transactions (see list).
     The lowered ratings reflect pool performance that has caused actual and projected credit support for the affected classes to decline considerably. All four transactions have experienced losses that have eroded overcollateralization (O/C) to levels that are significantly below their targets. Furthermore, delinquencies have escalated over the past six months. For series 2001-3, losses have, on average over the past six months, been approximately 2.10x monthly excess interest. For series 2005-1, losses have, on average over the past six months, been approximately 3.73x monthly excess interest. Severe delinquencies (90-plus days, foreclosures, and REOs) for the transactions, as a percentage of the current pool balances, range between
approximately 17.09% (series 2005-1) and 13.40% (series 2001-3). Realized losses for the transactions, as a percentage of the original pool balances, range between approximately 9.20% (series 2001-3) and 1.33% (series 2005-3).
     These performance trends have caused projected credit support for the transactions to fall well below the required levels. Standard & Poor’s will continue to closely monitor the performance of these transactions. If the transactions incur further losses and delinquencies continue to erode projected credit support, we will take further negative rating actions.
     Subordination, excess interest, and O/C provide credit support for the two transactions. The underlying collateral backing the certificates consists of both fixed- and adjustable-rate mortgage loans.

Bear Stearns Asset Backed Securities Trust
Residential mortgage-backed certificates
Series      Class       To              From
2001-3      M-2         BB              A
2001-3      B           B               BBB
2005-1      M-6         BB              BBB-
2005-1      M-7         CCC             BB
2005-2      M-7         B               BB
2005-3      M-6         B               BBB-
2005-3      M-7         CCC             BB

… which looks pretty horrific. But now let’s look at ALL of BSABST 2005-1:


 US$395 million asset-backed certificates, series 2005-1 
Class  Maturity Date   Rating  Rating Date    
A  Mar 25, 2035  AAA  Feb 24, 2005    
M-1  Mar 25, 2035  AA  Feb 24, 2005    
M-2  Mar 25, 2035  A  Feb 24, 2005    
M-3  Mar 25, 2035  A-  Feb 24, 2005    
M-4  Mar 25, 2035  BBB+  Feb 24, 2005    
M-5  Mar 25, 2035  BBB  Feb 24, 2005    
M-6  Mar 25, 2035  BB  Aug 24, 2007    
M-7  Mar 25, 2035  CCC  Aug 24, 2007    
R-I  Mar 25, 2035  NR  Feb 24, 2005    
R-II  Mar 25, 2035  NR  Feb 24, 2005    
B-IO  Mar 25, 2035  NR  Feb 24, 2005 

The SEC ID for this trust is 333-113636, for those who wish to see all the gory detail. Tranche sizes, from the prospectus on SEC / EDGAR are (this is SEC document 0000911420-05-000084.txt : 20050216) are:

Class A : $313,746,000 (pays LIBOR + 0.35% before optional termination / +0.70% afterwards)

Class M-1: $37,689,000 (+0.70% / +1.05%)

Class M-2: $18,549,000 (+1.40% / +2.10%)

Class M-3: $4,341,000 (+1.60% / +2.40%)

Class M-4: $3,946,000 (+2.20% / +3.30%)

Class M-5: $2,960,000 (+3.00% / +4.50%)

Class M-6: $4,538,000 (+3.50% / +5.25%)

Class M-7 was not offered in the prospectus. R-I and R-II are “residual interests in the real estate mortgage investment conduits established by the trust”, and were also not offered. B-IO gets all the Excess Spread. None of these last three classes had a stated principal value; I’m not going to tear apart the prospectus analyzing them because I don’t really care a lot how they work … I’m just after the principal values here!

The “optional termination” becomes effective “when the stated principal balance of the mortgage loans and any foreclosed real estate owned by the trust fund has declined to or below 10% of the stated principal balance of the mortgage loans as of the cut-off date”. At this point EMC Mortgage corporation could purchase all the assets.

At any rate, it should be clear that – while downgrades are always bad, and to be deplored by all right-thinking people – the downgrades that sounded so awful at the beginning of this post lose a lot of their ability to terrify when put into perspective.

Perspective is what’s needed when thinking about sub-prime … and I can’t provide it. I’m not a specialist, and I think a specialist would need a pretty good database to get it. What I really want is a transition study that has dollar figures attached, not just number of ratings. It would be nice, too, if interest rates could be attached to such a study … because, well, gee, the guys in the downgraded class M-6 were getting LIBOR + 350bp (and still are, since the issue is not in default)!

I’ll keep my eyes out, however, and whenever I see something interesting, I’ll post again.

Update 2007-09-18: I became involved in a discussion at Econbrowser in which this issue came up. In the course of the discussion I retrieved a bit more information from the prospectus, which I shall reproduce here:

The following table summarizes certain characteristics of the mortgage loans as of the cut-off date:

Number of mortgage loans……………………3,527
Aggregate principal balance…………..$394,649,130
Average principal balance………………..$111,894
Range of principal balance………$1,041 to $800,000
Range of mortgage rates……………0.00% to 16.50%
Weighted average mortgage rate……………..8.032%
Weighted average combined loan-to-value ratio……………………84.50%
Range of scheduled remaining terms to maturity……….9 months to 361 months

5 Responses to “More Sub-Prime!”

  1. […] PrefBlog Canadian Preferred Shares – Data and Discussion « More Sub-Prime! […]

  2. […] I gave an example of tranching when looking at the Bear Stearns product a few days ago. Now I want to clear up some possible confusion regarding the practice. […]

  3. […] As PrefBlog’s readers will know, that’s not how it works. The number of loans is basically irrelevant – you want to have enough diversification that you’re eliminating asystemic risk and reflecting the asset class’ systemic risk, but after that you’re simply increassing the size of the pool. The AAA ratings are only available through subordination. […]

  4. […] This got me interested in the actual contract language, so I went back to the security issue that I have been using as an – unscientifically chosen and possibly completely unrepresentative – example of a tranched RMBS CDO : Bear Stearns Asset Backed Securities Trust 2005-1. In order to find out what the contract between the securities holders and the securities issuers says, I’m going to try my hand at reading the contract. Old-fashioned of me, I know, but I’m an old-fashioned guy. The prospectus says by way of warning: Modifications of mortgage loans agreed to by the master servicer in order to maximize ultimate proceeds of such mortgage loans may extend the period over which principal is received on your certificates, resulting in a longer weighted average life. If such modifications downwardly adjust interest rates, such modifications may lower the applicable interest rate cap, resulting in a lower yield to maturity on your certificates. […]

  5. […] in order to make a sub-prime RMBS with a large AAA component, it must be tranched; for example, the Bear Stearns ABS I use as a model had a total value of USD 395-million, which was divided into seven publicly marketed and three […]

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