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Anatomy of ABX Indices

Moody's issues analysis of underlying deals

November 28, 2007

By SAM GARCIA


A new ratings agency report provides some insight into the ABX.HE indices and confirms that the transactions included in them closely track the performance of all subprime securitizations. The study identified factors that closely correlated to actual performance -- though credit scores and loan-to-values were not among them.

ABX indices were created when the International Swaps and Derivatives Association finalized the documentation for an ABS Credit Default Swap index in late 2005, according to ABX Performance Update: October 2007, a special report from Moody's Investors Service's Structured Finance division. The report was authored by Karandeep S. Bains, an associate analyst for the ratings agency.

The indices enabled investors to bet the value of subprime residential mortgage-backed securities would rise without actually buying the bonds. They also enabled investors to hedge their positions by purchasing credit protection based on ABX performance.

Four series of ABX indices currently exist, including ABX 06-1, 06-2, 07-1 and 07-2. Each index reflects ratings on 20 qualifying transactions from the largest subprime home equity ABS shelf programs that closed within the six-month period preceding their creation.

For instance, the ABX 06-01 references deals closed during the second half of 2005.

Within each series, a separate index exists for obligations rated AAA/Aaa, AA/Aa2, A/A2, BBB/Baa2 and BBB-/Baa3 by Moody's and Standard and Poor's

The deals included in each index must have had an offering size of at least $500 million, with at least 90 percent of the underlying collateral being first lien mortgages. In addition, weighted average FICO scores cannot exceed 659, no more than four deals can have the same originator and no more than six deals can have the same servicer.

"The performance of the pools underlying the ABX indices for the most part closely tracks the performance of the respective wider subprime universe," the author wrote. "However, the delinquency rate for deals underlying ABX 07-1 is trending marginally higher than the respective subprime universe at this stage."

Moody's noted the credit performance of ABX RMBS tranches and all U.S. RMBS tranches have deteriorated with each successive origination period when compared on a seasonally adjusted basis -- especially on successively lower rated tranches. But Aaa tranches have seen no negative rating actions by the agency. Moody's said it doesn't expect Aa rated tranches from ABX 06-2 and ABX 07-1 that were recently put on watch for possible downgrades to move by more than three notches.

First time buyers with limited credit histories but high FICO scores have distorted the traditional relationship between credit scores and loan performance. In addition, higher LTVs have become less of a predictor of performance.

But the share of loans with full income verification appears to be a strong indicator of deal performance, Moody's said. The same goes for the share loans with fixed rates, which was attributed to risk averse borrowers who are cautious decision makers.

Also significantly impacting performance was the originator.

"The worst performing deals in all three series tend to share the same set of originators -- Long Beach Mortgage Co., Argent Mortgage Co., BNC Mortgage Inc., Fremont Investment & Loan, New Century Mortgage Corp. and WMC Mortgage Corp.," the report stated. "The delinquencies for the weaker originators are 45 percent higher than other originators for ABX 07-1 deals at month 8, compared with 26% for ABX 06-1 and ABX 06-2 deals."

Current prices on ABX indices are quoted by Markit Group Limited at http://www.markit.com/information/products/abx.html.


Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]


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