Monday, September 24, 2007

A New Bear Stearns Deal

by Tanta on 9/24/2007 09:22:00 AM

It used to be basically impossible to keep up with the terms of newly-issued mortgage deals, but you could at least stay up to date with downgrades. Now that the situation is completely reversed, I thought it might be interesting to look at the terms of one of the very few new issues out there.

This Bear Stearns deal (Asset Backed Securities I Trust, Series 2007-AC6) just got rated. With 7.90% credit enhancement to the AAA tranches for an Alt-A deal--that's more than you used to get in some subprime--I thought it might be interesting to look at the prospectus.

Remember the uproar earlier in the year about Bear buying delinquent loans out of securities in an attempt, it was alleged, to "manipulate" the market? This prospectus has a new bit I've never seen before that clarifies that:

[A]s described in this prospectus supplement, the sponsor has the option to repurchase mortgage loans that are 90 days or more delinquent or mortgage loans for which the initial scheduled payment becomes thirty days delinquent. The sponsor may exercise such option on its own behalf or may assign this right to a third party, including a holder of a class of certificates, that may benefit from the repurchase of such mortgage loans. These repurchases will have the same effect on the holders of the certificates as a prepayment of the mortgage loans. You should also note that the removal of any such delinquent mortgage loan from the issuing entity may affect the loss and delinquency tests that determine the distributions of principal prepayments to the certificates, which may adversely affect the market value of the certificates. A third party is not required to take your interests into account when deciding whether or not to direct the exercise of this option and may direct the exercise of this option when the sponsor would not otherwise exercise it. As a result, the performance of this transaction may differ from transactions in which this option was not granted to a third party.
You have been warned, I guess. There is also this:
The sponsor may from time to time implement programs designed to encourage refinancing. These programs may include, without limitation, modifications of existing loans, general or targeted solicitations, the offering of pre-approved applications, reduced origination fees or closing costs, or other financial incentives. Targeted solicitations may be based on a variety of factors, including the credit of the borrower or the location of the related mortgaged property. In addition, The sponsor may encourage assumptions of mortgage loans, including defaulted mortgage loans, under which creditworthy borrowers assume the outstanding indebtedness of the mortgage loans which may be removed from the mortgage pool. As a result of these programs, with respect to the mortgage pool underlying any issuing entity, the rate of principal prepayments of the mortgage loans in the mortgage pool may be higher than would otherwise be the case, and in some cases, the average credit or collateral quality of the mortgage loans remaining in the mortgage pool may decline. . . .

Modifications of mortgage loans implemented by the related servicer or the master servicer in order to maximize ultimate proceeds of such mortgage loans may have the effect of, among other things, reducing or otherwise changing the loan rate, forgiving payments of principal, interest or other amounts owed under the mortgage loan, such as taxes or insurance premiums, extending the final maturity date of the mortgage loan, capitalizing or deferring delinquent interest and other amounts owed under the mortgage loan, or any combination of these or other modifications. Any modified loan may remain in the issuing entity, and the reduction in collections resulting from a modification may result in reduced distributions of interest or principal on, may extend the final maturity of, or result in an allocation of a realized loss to, one or more classes of the certificates.
You have been even more warned. Furthermore,
The underwriter intends to make a secondary market in the offered certificates, but the underwriter has no obligation to do so. We cannot assure you that a secondary market will develop or, if it develops, that it will continue. Consequently, you may not be able to sell your certificates readily or at prices that will enable you to realize your desired yield. The market values of the certificates are likely to fluctuate, and such fluctuations may be significant and could result in significant losses to you.

The secondary markets for asset backed securities have experienced periods of illiquidity and can be expected to do so in the future. Illiquidity can have a severely adverse effect on the prices of certificates that are especially sensitive to prepayment, credit or interest rate risk, or that have been structured to meet the investment requirements of limited categories of investors.
In case you hadn't noticed, you're getting warned again.

As far as the mortgage pool? It's fixed-rate Bridge Mix: 18% full doc; WA FICO of 701 with range from less than 600 to more than 800; average balance just under $306,000 with a range from $33,000 to $2MM; 14% non-owner-occupied; 29% CA and 10% FL; 35% interest only. The sort of thing that would have skated by a year ago, in other words. The big difference here: only 28% of loans are purchase-money, and only 19% have subordinate financing.

The loans are also rather older than new production issues have been in the last few years--averaging 7-10 months--which suggests that it took a while to put this deal together. I'd say this is less an indicator of what kind of loans are being made today than it is what kind of loans have been parked in Bear Stearns' inventory since the first quarter, waiting for the RMBS market to revive. And with subordination levels of nearly 8.00% on fixed rate "Alt-A," it's quite clear that rates to consumers for "non-conforming" loans have nowhere to go but up.