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Spectacular White Paper from Mitch Julis of Canyon on RMBs


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Despite the limited supply, prices remain cheap, in part because the assets are difficult to value. Hedge funds and big investors use computer systems to analyze the underlying loans and estimate, among other things, how many borrowers will default and how much money can be recovered in a foreclosure.


Take one security, JPALT 2006-S1 1A11, which was built from Alt-A loans, or mortgages that required little documentation verifying a borrower’s income.


On the surface, the numbers are not encouraging: of the 799 mortgages underpinning the bond, many in foreclosure-heavy California and Florida, about 21 percent are more than 60 days late on payments.


The annual default rate is about 7 percent, and of the homes sold out of foreclosure, investors take a 54 percent hit, according to data from Bloomberg. On average, about 5 percent of the homeowners refinanced their mortgages before they were due over the last 12 months.


That bond recently traded at nearly 70 cents on the dollar.


At that price, even if defaults and the losses increase, an investor can still make more than 5.4 percent, an analysis shows. In a rosier prediction, where defaults drop slightly and the losses on the sale of foreclosed homes stay flat, the bond returns nearly 8.7 percent.

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I have been trying to figure out ways to buy into this supply/demand imbalance for a while now - the only way that I have found to get this exposure via a smart manager has been the doubleline total return fund. However I still have not found a pureplay fund that is long only RMBS. Any ideas?

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