Case Study Long Beach Mortgage Loan Trust

e are equity investors, but in mid-December 2008 we made our first debt investment when we bought a piece of a 2006 bubble-era subprime pool of mortgages suffering from catastrophic defaults. Were we crazy? You decide. . . .

The securitized pool of mortgages (called a residential mortgage-backed security or RMBS) is called the Long Beach Mortgage Loan Trust 2006-8, and it's a fairly typical pool of subprime mortgages from near the peak of the bubble in 2006. It contained 6,447 mortgages, valued at $1.38 billion (later increased to 6,647 loans totaling $1.42 billion), and was structured at inception as shown in Table 10.1. Over 80 percent of the pool was rated AAA, and nearly all was rated investment grade (98 percent by S&P and 96 percent by Moody 's).

Table 10.1 Structure of Long Beach Mortgage Loan Trust 2006-8

Expected Rating

Credit

Class

(S&P/Moody's)

Principal Balance ($)

Enhancement

I-A

AAA/Aaa

$

366,091,000

18.60/

II-A1

AAA/Aaa

$

322,788,000

18.60/

II-A2

AAA/Aaa

$

124,929,000

18.60/

II-A3

AAA/Aaa

$

236,928,000

18.60/

11-A4

AAA/Aaa

$

73,178,000

18.60/

M-1

[AA+]/Aa1

$

43,493,000

15.45/

M-2

[AA+]/Aa2

$

39,351,000

12.60/

M-3

[AA]/Aa3

$

24,853,000

10.80/

M-4

[AA]/A1

$

22,092,000

9.20/

M-5

[AA-]/A2

$

21,401,000

7.65/

M-6

[A+]/A3

$

19,330,000

6.25/

M-7

[A]/Baal

$

13,807,000

5.25/

M-8

[A-]/Baa2

$

11,046,000

4.45/

M-9

[BBB+]/Baa3

$

10,355,000

3.70/

M-10

[BBB] /Bal

$

8,975,000

3.05/

M-11

[BBB-]/Ba2

$

13,807,000

2.05/

C

Unrated

$

28,303,000

Total

$1

,380,727,000

Source: Long Beach Mortgage Loan Trust 2006-8 Prospectus Supplement, September 15, 2006.

Source: Long Beach Mortgage Loan Trust 2006-8 Prospectus Supplement, September 15, 2006.

Table 10.2 shows that the loans in the pool are high-interest-rate (8.46 percent) loans to deep subprime borrowers (639 average FICO score) who are really stretching to make payments (39.4 percent average debt-to-income ratio—and you can be sure many were lying about their incomes). Almost 83 percent are adjustable-rate mortgages, more than half of which reset within two years. More than half are in California and Florida, and almost 48 percent are stated-income/limited-documentation/no-doc loans.

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