Amherst Holdings, if you'll remember, is the Texas brokerage that duped the big Wall Street banks by (somehow) arranging for the servicer on several subprime MBS to exercise its "cleanup call" provisions, much to the banks' surprise. Exercising the cleanup calls essentially made the CDS contracts on the subprime MBS that the banks had bought from Amherst worthless. Amherst has been poaching talent from Wall Street recently, and its most prominent hire was probably Laurie Goodman, the former UBS fixed income analyst and well-known mortgage securitization expert. As it happens, Goodman is also the co-author of Subprime Mortgage Credit Derivatives, one of the ubiquitous Wiley Finance reference books. Ironically, a footnote on page 222 says:

Modeling the call is an interesting topic, as [cleanup] calls have historically not been exercised in an economically “ruthless” manner.
Until now. Maybe Goodman just wanted a data point for her model. In fact, until proven otherwise, I'm going to assume that was the real reason Amherst put on the trades. Goodman wanted a slightly more robust model. Models strike again!


jck said...

I can't find anything wrong with Amherst trade. It appears from the prospectus that the servicer has to pay the principal oustanding for loans only if they are current, but he cannot pay more than market for defaulted or foreclosed loans or REOs (less reasonable costs). The pool had 127 loans outstanding of which 73 were current and 54 in various state of defaults, so the servicer (or rather the trust) clearly did not repay the bonds at par and did not have to...but I am not a lawyer....if you want to take a look the deal is SASCO Mortgage Pass-Through Certifidates/Series 2005-WMC1.

Economics of Contempt said...


I was just going by the WSJ article, which said the bonds were "paid off in full." I'm out of the loop on the whole Amherst controversy, but that's why I was initially suspicious.

My understanding is that the banks had CDS on the bonds, which were rendered worthless when Aurora ("at the behest of Amherst," according to the WSJ) exercised the cleanup calls and repaid the bonds at par. If you're right that the prospectus says the servicer can't pay more than market for defaulted or foreclosed loans (I haven't looked at the deal yet, but that's standard), then how did the bonds get "paid off in full"? If the bonds weren't repaid at par, then I don't think there'd be any controversy, because then exercising the cleanup calls (probably) wouldn't have rendered the banks' CDS worthless. My understanding is that the banks are pissed because the bonds were repaid at par. But like I said, I'm out of the loop on the Amherst controversy (since we had a spurt of deal draftings right after the WSJ article was published).

Thanks for the deal name. I'll take a look at the trust and servicing agreements when I get a chance.

jck said...

I don't think the bonds were repaid at par, the trustee cannot pay more than what he got for the mortgages (that's in the prospectus), so the wsj is likely wrong on that point.

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