Thursday, November 8, 2007

Fundamentals, not liquidity conditions, are behind MBS crash

From FT Alphaville:

Many banks, if not financial institutions in general, would have you believe that the current rout in mortgage-backed debt is largely being driven by irrational fear. A few bad subprime debts buried around the structured universe are scaring buyers out of markets.

But, said CreditSights, in a note to clients on Wednesday, current pricing levels reflect fundamentals, even for the most highly-rated debt. Mortgage securities across the board are overrated and overvalued:

The harsh truth about the outlook for the AAA tranches - necessary downgrades, if not defaults - should put the lie to the argument that current low prices in AAA RMBS tranches - let alone AAA tranches of mezzanine RMBS CDOs - are somehow the victim of poor liquidity conditions, and do not reflect the true fundamentals of the situation.

CreditSights publish the results of a survey they have conducted on “188 individual relatively large RMBS deals”. The outlook, by all accounts, is grim....MORE