Tuesday, August 14, 2007

Sub-prime returns.

I just did a little experiment on a 2-28 with the following assumptions:

Five year life (stiff prepayment penalties before year five), after which everyone who survives refinances.

Coupon rate starts at 6 for two years, goes to 9 for a year and then 12 for two years.

10 percent default rate over five years with 70 percent loss severity.

Mortgage is tranched into two pieces. Piece A gets the first 80 percent of the equity and a six percent coupon; Piece B gets all the rest.

The IRR on this set up fro the B-piece comes in around 9 percent. Not great, given the risk, but not bad either. It should be enough to pay any leverage taken on to buy it. So...where am I going wrong? I will be happy to share the spreadsheet with anyone who can help me out.

1 comment:

davelindahl said...

Refinance With Seller Carrying Back A Second Mortgage scenario is very similar to the Equity Share Owner situation but the owner does not become an equity partner; he becomes a second mortgage holder reoported by David lindahl scam.
This saves you a great deal of money in the long run, because you do not give up 20% of the profit and 20% of the equity!