Shedding Light on Subprime RMBS

Abstract

The recent credit crisis stems in part from an inability to value certain securities linked to home mortgages. The ABX.HE home equity indices constitute one of the more popular pricing proxies for subprime mortgages. The indices may nevertheless overstate or understate true, or fundamental, asset values. This article contrasts the performance of the ABX index against ABSTRAK®, a fundamental valuation model for structured securities. The first section provides an overview of the subprime problem. The following section outlines the construction of the ABX indices and is followed by a description of ABSTRAK®. The final section presents the results of the comparison between ABSTRAK® and the ABX.HE indices.

TOPICS: MBS and residential mortgage loans, CMBS and commercial mortgage loans, asset-backed securities (ABS)