When would a paydown on an ABS result as a gain vs loss? I am a little confused here. Thanks.
paydown is an option. if you are exercising option in the money it is realized gain/loss, depending on position
Is that true? I always assumed it was calculated off of the underlying collateral. Even for non-performing MBS there are ones that have monthly losses and some that just dont adjust their factor so I am not positive on how losses at the security level are generated.
All a paydown is is the return of principal in excess of what you expect for a bond’s given amortization schedule. The gain or loss would depend on if you purcahse a bond at a premium or a discount to par ($100). It also ties in to the time value of money.
For instance, if you paid $102 for a bond or 102% of its outstanding face amount and it paid off the next day, you get back only 100% of the excess face amount. So you’ve lost the opportunity to earn interest in the future. That’s basically what that $2 in price over par value ($102 - $100) represents. Ideally, you want this bond to payoff slowly or at least not faster than expected.
Conversely, if you pay less than par, a paydown is a gain. If you only paid $95 for a bond (95% of its outstanding face amount) and it pays off tomorrow you get back 100% of the amount outstanding in a short time frame. Pretty good, right? In this case you’d like the paydowns to be as fast as possible.
It is based of the underlying collateral i.e. how faster the borrower who owes on the loan pays. The ABS is actually short the option while the borrower who owes on the loan which makes up the collateral is long the option.
Perfect, this makes sense. Thanks!
Makes sense. I have a ton of experience with these securities from an accounting standpoint of the owner of them. Was always curious about how they were calculated for the specific security.
I guess I am still confused as to paydown losses at the security level though. Regardless of the price you paid there are still many times a security will report a factor decrease with no principal payment and an amount listed as paydown losses on BBG (this are usually for older private label MBS) Where is that loss number calculated?
i think factor can decrease if no principal is paid if additional losses were applied or negative recoveries
In addition to the other reply, are these always amortizing ABS? It’s not something like an Interest Only tranche?
Yea these arent something like an IO. Frequently they will have a paydown but only about 50% will come through cash, it will list the remaining amount as a paydown loss on BBG. The total factor change will obviously be equal to the principal distributed + losses.
S2000 got any knowledge on this? Didnt he do some valuation of MBS?