Analyzing Abacus: Loan-level collateral backing Wall Street's infamous deal

This week's podcast speaker, Doug Carey, who leads the development of solutions for structured products and credit analysis for FactSet, looks at the health of loans backing the Abacus deal.

Carey investigates loans as of 2006 and compares these loans against those sold from 2005-2007, as well as against  those sold in 2003. In the discussion we address whether the security was ever healthy and how can an investor use analysis to detect loan risk.

Also, be sure to ready Carey's analysis on the FactSet Risk Blog.

Subscribe to our podcast today. Read the transcript here.

Use the show notes below to see the major highlights from our discussion:

1:00 – Ninety tranches backed the Abacus deal. We investigated only a few of those.

1:31 – The goal of the analysis was to hold lenders constant and change the date to see how the loan characteristics changed from 2003 to 2006.

2:25 – One deal behind Abacus, issued by ACE mortgage, represented loans approximately 8 months old at the time Abacus was being marketed. At that time, the loans were already 11% delinquent.

4:15 – Many investors threw up their hands when they attempted to understand the large number of underlying loans backing CDOs, including Abacus. They invested on their gut.

5:30 – Compared to other securities like Abacus, there was no real difference in how difficult it would have been for investors to understand the risk they were taking.

8:00-8:45 – Investors can and should look at the types of loans backing a security, for instance, how many are interest only loans, or how many are hybrid ARMs.

11:15 – To better analyze tranches, investors can look at First Loss CDR, which will show an investor the default rate necessary to generate the first dollar of loss on a security.

13:15 – The foreclosures on the loan backing that ACE deal were already 5% when the Abacus deal was being marketed. The First Loss CDR was slightly above 5%, that is one major warning sign that the security is in trouble. It provides a gauge of where you stand today.

16:30 – The sheer number of loans backing a CDO was always a problem. Today, computers are faster and have more memory than in 2006. At FactSet, we have distributed processing at the security level, so when analyzing a complex security your computer doesn't slow to a crawl.