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Investments

Investors still see relative value in subprime mortgage bonds

Barclays cites cautious optimism at ABS East

October 10, 2013
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Describing a conference in two words is becoming a bit of a thing.

Yesterday, I described the feeling at the ABS East 2013 conference, held earlier this week in Miami, as one of subdued complicity.

Analysts at Barclays (BCS) say it is more like "cautiously optimistic," in an email titled, "Notes from ABS East 2013."

Their take is that investors are actually looking forward to the year ahead. I didn't get that impression, obviously, and the truth is likely somewhere in between.

Barclays said most investors remain confident about the strength of housing fundamentals, which is true, but these fundamentals remain woefully backed by a federally supported mortgage finance system, as I mentioned in my blog yesterday.

This is something the Barclays analysts admitted is weighing on the mind:

"Some raised a few concerns about mortgage credit fundamentals, especially whether there was some complacency creeping into projections of re-defaults of modifications, timelines and severities."

"Despite near-term concerns on GSE supply, there was widespread agreement that technicals remain positive and that spreads should continue to compress, especially over the medium term."

But where investors are really chomping at the bit continues to be in the subprime bond market. Barclays continues to like this space as well, but questions remain as to how much can be recovered through reps and warrants.

Not that there is more risk of rising defaults. Presumably, reps and warrants challenges are flatting out, as are the rates of default in the subprime sector.

So it appears even the concerns being raised are unfounded. Data from Deutsche Bank (DB) actually shows a flattening of modifications in the subprime sector, as well as a drop in redefaults, except for in 2008 vintages.

However, even though home prices are expected to rise 5% to 10% next year, there are still some big settlements to come, which will likely provide a psychological drag on the mortgage market.

Barclays doesn’t think it will be too damaging, however, and I am beginning to believe in that again.

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