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Shane Sherlund Federal Reserve Board*

Comments on “Vintage and Credit Rating: What Matters in the ABX Data During the Credit Crunch”. Shane Sherlund Federal 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. Discussion.

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Shane Sherlund Federal Reserve Board*

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  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 herein are mine alone and do not necessarily reflect the views of the Board of Governors, its members, or its staff.

  2. Discussion • Very nice, careful paper! • Decompose movements in ABX-HE prices Source: Markit.

  3. Discussion • Common factors Source: Markit, RadarLogic.

  4. Discussion • Ratings factors Source: Markit.

  5. Discussion • Vintage factors Source: Markit.

  6. Cumulative Default Curves September 2008 Source: Calculations from First American LoanPerformance.

  7. Discussion • Liquidity effects Source: Markit, Federal Reserve.

  8. 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

  9. 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

  10. Comments • Composition of each vintage • Underwriting • Geography

  11. House Price Appreciation 2000-2008 Source: FHFA House Price Index.

  12. Percent of Subprime Mortgages with Negative Equity by State 2005-2008 Source: Calculations from First American LoanPerformance, FHFA and S&P/Case-Shiller house price data.

  13. Serious Delinquency Rates by State 2005-2008 Source: First American LoanPerformance.

  14. Comments • Liquidity effect • Investors? • Borrowers? • Both?

  15. Subprime Mortgage Rate Resets September 2003 Source: First American LoanPerformance.

  16. Subprime Mortgage Rate Resets September 2004 Source: First American LoanPerformance.

  17. Subprime Mortgage Rate Resets September 2005 Source: First American LoanPerformance.

  18. Subprime Mortgage Rate Resets September 2006 Source: First American LoanPerformance.

  19. Subprime Mortgage Rate Resets September 2007 Source: First American LoanPerformance.

  20. Subprime Mortgage Rate Resets September 2008 Source: First American LoanPerformance.

  21. Cumulative Prepayment Curves September 2008 Source: Calculations from First American LoanPerformance.

  22. Comments • Measure of fit? • R-squared (pseudo R-squared) • “Variance decomposition”

  23. 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

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