Thursday, December 17, 2009

Rollout of PrimeX Unlikely to Pressure Cash Prices

Original posted on the Housing Wire by Diana Golobay:

Barclays Capital (BarCap) researchers brought investors good tidings and peace of mind with market commentary this week that indicated the rolling out of a new family of asset-backed securities (ABS)-related indices should not pressure cash prices any lower.

A set of credit default swap (CDS) indices based on triple-A jumbo and Alt-A bonds will soon rollout into the market, after a vote by the dealer community last week. The indices, similar to the ABX indices, will be called ABX.Prime or PrimeX.

Investors have been concerned — recalling the way ABX.HE’s debut years ago aggravated the downward price spiral in subprime — that PrimeX’s rolling out will make cash prices plummet. But BarCap researchers assured concerned investors that the PrimeX rollout is unlikely to pressure cash prices lower, but will increase price volatility.

While information on deals and structure for PrimeX remains limited, BarCap researchers said forming a well-grounded valuation view is difficult. But concerns about prime cash prices plummeting as a result of the PrimeX debut are “overblown,” they said.

“On the cash side, the jumbo and Alt-A sectors continue to offer strong yields (8-9%) across different macro and modification scenarios, significantly higher than comparable asset classes such as consumer ABS, CMBS [commercial mortgage-backed securities] and corporates,” BarCap said. “Third-party repo leverage and PPIP [Public-Private Investment Program] make these yields look even more attractive. While PrimeX provides an avenue to short prime mortgages, attractive unleveraged yields and even higher leverage, if anything, might make it a chosen avenue to put on long recovery trades.”

When ABX.HE rolled out in ‘06, it triggered a process that led to faster price discovery, which BarCap noted made new securitizations nonviable and eliminated opportunities for subprime refinancing. That sort of price discovery has already occurred to some degree in prime. Refinancing opportunities are already limited in non-agencies, so PrimeX’s debut should not worsen the situation.

“In other words,” BarCap researchers noted, “the market is pricing in credit risks in these mortgages more effectively than it did in 2006-07.”

But the rollout of the indices may increase price volatility in non-agency cash prices.

“[W]e have repeatedly mentioned that an across-the-board blowout in risk premiums could put pressure on prices. Although we do not believe PrimeX will trigger this kind of blowout, it could amplify and accelerate its effects.”

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