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We construct five potential housing market scenarios

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Unformatted text preview: housing market scenarios that represent a broad spectrum of future outcomes. • Aggressive: 11% HPA over the life of the pool • 8% HPA for life • Base: HPA slows to 5% by end-2005 • Pessimistic: 0% HPA for the next 3 years, 5% thereafter • Meltdown: -5% for the next 3 years, 5% thereafter E s t i m a t i n g C o l l a t e r a l P e r f o r m a n c e a c r o s s t h e s e F i ve S c e n a r i o s severities We construct August 2005 Lehman Brothers U.S. ABS Weekly outlook and Source: prepayeach Wure construct projected vectors for prepayments, defaults, delinquencies and estimated across o five scenarios based on sensitivities of collateral performance to HPA in our credit vectors for scenario using historically estimated sensitivities. previous article. However, our sample is estimated between a range of 5% to 11% HPA since historical subprime performance is limited in a declining/flat housing market. In the absence of any other data, we linearly extrapolate observed sensitivities between this range to a flat/declining environment in our pessimistic and meltdown scenarios. Our curves across the five scenarios are shown in Figure 2. Figure 2. Pro j ected Co llater al Perfo rman c e acro s s HP A Scen ario s b y Deal Ag e FRM Voluntary Prepayments ARM Voluntary Prepayments 35 30 25 20 80 70 60 50 40 -8*.#!(--8#.*(%*/+B!!G/8!%,#!<==>[email protected](%(:#%&!%,#!8#E(%*/+:,*-:!F#%'##+!123! ([email protected]!-#80/8)(+.#!)#%8*.:&!:9.,!(:!E*0#H%/[email protected](%#!I5JKL!E/::!:#?#8*%A!IM,(8%!>NL&!%/%(E! @#E*+O9#+.*#:!IM,(8%!>PL&!5JK!E/::#:!IM,(8%!>QL!([email protected]!5JK!E/:...
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