Timing is Everything: Sources of Uncertainty in Non-Agency Cash Flow Timing

Abstract

The cash flows on private-label securitizations are very difficult to predict, and this uncertainty can make a large difference in the yield on the security. This article highlights a number of sources of uncertainty. It shows 1) the lag between last payment and liquidation is stretching out, and it is not doing so evenly across servicers; 2) among loans not currently delinquent, a large and growing percentage are re-performing, and the re-default rates on these loans are quite high; 3) the implementation of Home Affordable Modification Program (HAMP) modifications adds an additional layer of uncertainly; 4) legislative changes may slow the pipeline even more; and 5) servicers are likely to advance on fewer loans going forward. The authors then make the point that further government action will be needed down the road, when current plans do not stem the tide of foreclosures.

TOPICS: Portfolio theory, portfolio construction, fixed-income portfolio management