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.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment