Mortgage Backed Securities Thesis

Barnett-Hart’s interest in CDOs stemmed from a summer job at an investment bank in the summer of 2008 between junior and senior years…..

Asset securitisation represents an alternative risk management and refinancing method, which allows issues to convert classifiable cash flows from a diversified portfolio of pre-existing assets and receivables (liquidity transformation and asset diversification process) of varying maturity and quality (integration and differentiation process) into negotiable capital market paper, so-called "asset-backed securities" (ABS).

We did, however, read his acknowledgments, where Lewis praises “A. Barnett-Hart, a Harvard undergraduate who had just written a thesis about the market for subprime mortgage-backed CDOs that remains more interesting than any single piece of Wall Street research on the subject.” While unsure if we can stomach yet another book on the crisis, a killer thesis on the topic? We tracked down Barnett-Hart, a 24-year-old financial analyst at a large New York investment bank.

She met us for coffee last week to discuss her thesis, “The Story of the CDO Market Meltdown: An Empirical Analysis.” Handed in a year ago this week at the depths of the market collapse, the paper was awarded summa cum laude and won virtually every thesis honor, including the Harvard Hoopes Prize for outstanding scholarly work.

“Her thesis shows there were ways to discover things that everyone should have wanted to know.

That it took a 22-year-old Harvard student to find them out is just outrageous.” Barnett-Hart says she wasn’t the most obvious candidate to produce such scholarship.

Although CMBS suffered large scale losses during the past financial crisis, currently, this segment of the structured finance market has almost recovered to its pre-crisis level.

While evidence was found regarding the systematic misrepresentation of loan quality information for residential mortgages, there was no evidence of large scale misreporting for CMBS.

This overstatement lead to Loan-to-Value ratio and Debt-Service Coverage Ratio being misreported as 67.1% from 84.2% and DSCR as 1.72 from 1.59.

The levels of aggregate over-estimation substantially differed among originators and the variations explained the performance differences between originators.


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