In the movie The Big Short, hedge fund manager Michael Burry (played by Christian Bale) is the man that looks inside sub-prime RMBS and discovers nothing but a mess of toxic assets. Chris Joye did something similar on Friday:
One of our best “short” (as opposed to “long”) ideas this year has been to bet that the credit spreads on residential mortgage-backed securities (RMBS) would widen – reducing their price – as a function of the toxic combination of falling house prices, rising defaults, surging supply and plummeting home loan prepayment rates. (We largely exited our RMBS holdings in February 2018.)
We have particularly warned that the subordinated, or junior-ranking, tranches of recent RMBS issues with little-to-no loan “seasoning” (ie, loans recently originated), which have been popular with unsophisticated investors, were at risk of credit rating downgrades as house price declines tracked to our early 2017 forecast of a national peak-to-trough fall of about 10 per cent.
