Non-Agency RMBS Investors Earn Higher Yields in Texas

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MORTGAGE EXPERT
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When it comes to property values, Texas has fared well during the housing market downturn — leaving the state’s mortgages with better equity positions than loans in other states. But despite its standing, investors of private-label residential mortgage-backed securities are earning far higher yields than on loans in other states.

Low rates that have dominated the past few years have reduced the weighted-average coupons on non-agency adjustable-rate mortgages more than on fixed-rate mortgages.

But the lower WACs have reduced near-term payment stress on ARMs.

The findings were discussed in the Mobiuss Market View newsletter from data analytics provider Opera Solutions.

“However less interest from these loans can potentially reduce the excess interest available for their respective bonds, depending on deal structures, which may adversely affect credit enhancement,” the report said.

In Texas, non-agency WACs are “consistently higher” than for its counterparts.

The spread is especially pronounced on ARMs, with WACs on Texas ARMs nearly 100 basis points higher than on ARMs in other states.

At the same time, Texas has show relatively small declines in property values during the credit crisis.

As a result, loan-to-value ratios have remained among the lowest of all states.

Weighted-average LTVs on securitized mortgages in Texas have drifted from a little above 70 in mid-2011 to just below 70 percent as of August 2012.

The Lone Star State’s standing has resulted in lower borrower equity risk than in other states.

“Thus paradoxically, the lowest overall market risk loans, from Texas, are producing the highest compensation for the investors in terms of WAC,” the report stated.

The report’s author and Opera Solutions Vice President Bill Hunt added, “This fact has interesting ramifications on everything from prepayments, defaults and loss severities to credit support for bonds exposed to Texas borrowers and properties.”

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