Since the last issue of MIAC Perspectives released in February, we have observed some optimism that mid- to late-March trading ranges could have been the lows for financial assets.  Although assets have been priced to worst case housing market scenarios, lately, investors appear to be increasing bids as importance is shifting toward acquiring product and getting capital invested.  At MIAC, we believe there are both benefits and burdens yet to come.  As capital gets invested and assets are sold freeing up the short term financing lines that became long term as a result of the liquidity crisis, the market will benefit from increased liquidity for redesigned, new loan origination but a substantial burden will be navigating through the reality when delayed losses start to hit.  The obvious challenge for investors is being able to have a bid that is high enough to acquire product, low enough to account for reasonable loss assumptions and serves as an acceptable ownership level in the eyes of accountants and auditors.

      An important catalyst in restoring the mortgage market will be through new money coming into Level 3 assets.  This puts investors face to face with the challenges of marking an illiquid asset based on reasonable model input assumptions which further pronounces the need to have a fine tuned collateral performance model.  One important attribute to the loss modeling we do here at MIAC is accounting for the effects of changes in house price indices.  I wrote the essay “Home Prices Indices – Critical differences among leading indices that will affect loss modeling” which provides useful insight to the differences and applications of the prominent index creators.

      Continuing on the theme of the importance to market restoration that investors are able to successfully place money in illiquid assets, Sachit Ramdas Kumar, Managing Director of the Capital Markets Group has provided the essay, “FAS 157 for Illiquid Mortgage Assets Recent Events” to address the recent additional guidance provided by the SEC.  Mr Kumar discusses MIAC’s interpretation of “forced liquidation or distressed sale” and how that relates to the role of a valuation specialist.

      In the agency mortgage arena, Tina Reid, Senior Vice President, Secondary Solutions Group has written the essay, “Remember When Having a FNMA Master Meant Something”.  She discusses the leverage that FNMA is using given their popularity for execution in the current market place and provides thoughts for secondary solutions in dealing with the change.

      Senior Vice President, Capital Markets Group, Robert Lee, updates our readers on developments in the MSR market with MIAC’s MSR Prespective.  Mr Lee discusses the work done by MSR valuation modelers to determine slower prepayment rates on illiquid origination as well as provide color on recent MSR supply and demand.

      Lastly, I would like to introduce myself, Bryan S. Hughes, Vice President in the Capital Markets Group and editor of the MIAC Perspectives newsletter.  I recently joined MIAC from UBS with the goal to provide analytical expertise from previous market experience as a whole loan trader and bond structurer.  MIAC has recently made other new hires to meet the increasing demands for third party valuation business in this time of pricing uncertainty.  Please do not hesitate to contact myself or any MIAC team member for guidance in today’s mortgage markets.