Barclays Warns of High Losses in Non-Agency Securities

Barclays Capital expects high losses on collateral backing most most non-agency securitizations including jumbo, Alt-A, and option adjustable-rate mortgages. For example, the firm expects more than 70% losses on ’07 vintage subprime pools, and 15-30% on most jumbo pools. But as this has already been priced into the market, Barclays said double-digit yields in select non-agency areas remains possible. “This is not to say that there are no risks in owning non-agencies at current levels,” Barclays researchers said in a report Friday. “As we have maintained over the past few weeks, there is little upside from fundamental credit performance for non-agencies. Overall default expectations remain fairly high.” Barclays noted, however, that the loss-adjusted unleveraged yields in non-agencies remain much higher than for other comparable securities. Unleveraged yields on non-agencies range from 6-8% among Reverse REMIC to 20-25% among mezzanine triple-As, while unleveraged yields on other securities range from 1.5-4.5% among consumer asset-backed securities to 9-11% among agency mortgage-backed securities. Risk premium has been shrinking as real money investors looking for the high yields edged into the space in the recent weeks. Barclays also expects significant demand from PPIP managers. Ratings-related risk has become minimal, Barclays noted, as few securities remain triple-A rated. “Along with these factors, we believe that the strong Re-REMIC bid will also provide some support to non-agency prices in the near term,” Barclays said. Write to Diana Golobay.

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