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![Page 1: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/1.jpg)
Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch”
Shane SherlundFederal Reserve Board*
*The views expressed herein are mine alone and do not necessarily reflect the views of the Board of Governors, its members, or its staff.
![Page 2: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/2.jpg)
Discussion
Very nice, careful paper!
Decompose movements in ABX-HE prices
0
20
40
60
80
100
120
06Q1 06Q3 07Q1 07Q3 08Q1 08Q3
AB
X p
rice
Source: Markit.
![Page 3: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/3.jpg)
Discussion
Common factors
0
20
40
60
80
100
120
-40
-20
0
20
40
06Q1 06Q3 07Q1 07Q3 08Q1 08Q3
2006-1 AAA2007-1 AAA
2006-1 BBB-2007-1 BBB-
HPA
AB
X p
rice
sH
PA
(percent)
Source: Markit, RadarLogic.
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Discussion
Ratings factors
0
20
40
60
80
100
120
06Q1 06Q3 07Q1 07Q3 08Q1 08Q3
AAA AA A BBB BBB-
2006
-1 A
BX
pri
ces
Source: Markit.
![Page 5: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/5.jpg)
Discussion
Vintage factors
20
30
40
50
60
70
80
90
100
110
06Q1 06Q3 07Q1 07Q3 08Q1 08Q3
2006-1 2006-2 2007-1 2007-2
AA
A A
BX
pri
ces
Source: Markit.
![Page 6: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/6.jpg)
Cumulative Default CurvesSeptember 2008
Source: Calculations from First American LoanPerformance.
![Page 7: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/7.jpg)
Discussion
Liquidity effects
0
20
40
60
80
100
120
-100
0
100
200
300
400
06Q1 06Q3 07Q1 07Q3 08Q1 08Q3
2006-1 AAA2007-1 AAA
2006-1 BBB-2007-1 BBB-
LIBOR-OIS
AB
X p
rice
s
LIBO
R-O
IS (basis points)
Source: Markit, Federal Reserve.
![Page 8: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/8.jpg)
Discussion
Common factor Relatively small effect early on; low correlation Onset of financial turmoil, significant and
persistent increase Systematic, non-diversifiable risk High correlation across assets
Asset rating and vintage factors Effects decrease over time Distinguish between vintages and tranches Roles in asset volatility small
![Page 9: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/9.jpg)
Discussion
Liquidity premium Influence increased at onset of financial turmoil Along with common factor, accounts for downward
pressure on ABX prices Across ratings Across vintages
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Comments
Composition of each vintage Underwriting Geography
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House Price Appreciation2000-2008
Source: FHFA House Price Index.
-30
-20
-10
0
10
20
30
2000 2002 2004 2006 2008
Per
cent
(an
nual
rat
e)
CA, FL, AZ, NV
OH, MI, IN
National
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Percent of Subprime Mortgages with Negative Equity by State2005-2008
Source: Calculations from First American LoanPerformance, FHFA and S&P/Case-Shiller house price data.
0
10
20
30
40
50
60
70
2005 2006 2007 2008
CA, AZ, FL, NV
OH, MI, IN
Rest of U.S.
Per
cent
of
loan
s
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Serious Delinquency Rates by State2005-2008
Source: First American LoanPerformance.
0
5
10
15
20
25
30
35
2005 2006 2007 2008
CA, AZ, FL, NV
OH, MI, INRest of U.S.
Per
cent
of
loan
s
![Page 14: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/14.jpg)
Comments
Liquidity effect Investors? Borrowers? Both?
![Page 15: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/15.jpg)
Subprime Mortgage Rate ResetsSeptember 2003
Source: First American LoanPerformance.
0
50000
100000
150000
200000
250000
300000
350000
2002 2004 2006 2008 2010 2012
Nu
mb
er
of l
oa
ns
![Page 16: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/16.jpg)
Subprime Mortgage Rate ResetsSeptember 2004
Source: First American LoanPerformance.
0
50000
100000
150000
200000
250000
300000
350000
2002 2004 2006 2008 2010 2012
Nu
mb
er
of l
oa
ns
![Page 17: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/17.jpg)
Subprime Mortgage Rate ResetsSeptember 2005
Source: First American LoanPerformance.
0
50000
100000
150000
200000
250000
300000
350000
2002 2004 2006 2008 2010 2012
Nu
mb
er
of l
oa
ns
![Page 18: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/18.jpg)
Subprime Mortgage Rate ResetsSeptember 2006
Source: First American LoanPerformance.
0
50000
100000
150000
200000
250000
300000
350000
2002 2004 2006 2008 2010 2012
Nu
mb
er
of l
oa
ns
![Page 19: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/19.jpg)
Subprime Mortgage Rate ResetsSeptember 2007
Source: First American LoanPerformance.
0
50000
100000
150000
200000
250000
300000
350000
2002 2004 2006 2008 2010 2012
Nu
mb
er
of l
oa
ns
![Page 20: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/20.jpg)
Subprime Mortgage Rate ResetsSeptember 2008
Source: First American LoanPerformance.
0
50000
100000
150000
200000
250000
300000
350000
2002 2004 2006 2008 2010 2012
Nu
mb
er
of l
oa
ns
![Page 21: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/21.jpg)
Cumulative Prepayment CurvesSeptember 2008
Source: Calculations from First American LoanPerformance.
![Page 22: Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch” Shane Sherlund Federal Reserve Board* *The views expressed.](https://reader035.fdocuments.us/reader035/viewer/2022062713/56649f4a5503460f94c6c621/html5/thumbnails/22.jpg)
Comments
Measure of fit? R-squared (pseudo R-squared) “Variance decomposition”
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Summary
Ratings and vintage factors Effects decreased over time Role in asset volatility small
Common factor Significant and persistent effect once financial
turmoil started Systematic risk; high asset correlations
Liquidity premium Influence increases over time