OTTI MORTGAGE VALUATIONS

Mortgage market turmoil generated by fears of mortgage default is depressing non-agency mortgage security prices and reducing trading activity. As a result, the Other Than Temporary Impairment (OTTI) accounting policy has become an increasing concern for both auditors and investors. If price drops are deemed to be other than temporary and/or principal losses are expected to occur, OTTI policy requires investors to recognize current market value losses in the income statement. Given these serious implications, auditors now require independent expert valuations to validate the investor’s internal valuations.

o3 domain experts provide independent valuations for those illiquid non-agency mortgage securities (RMBS) in a context that directly addresses OTTI concerns. The two primary drivers of our valuation are the liquidity discount (temporary market illiquidity) and expected losses on the bonds. While the liquidity discount is a market-wide factor, expected bond losses are unique to each security. Using our proven analytic framework, we estimate the loss for each security based on projected default, severity, and prepayment vectors. Thus current valuations are segmented into “liquidity discount” and “expected losses” — the two key OTTI determinants.

Our approach provides a sound, analytically-based justification for security valuations supporting the investor’s discussions with auditors, regulators, and the board of directors. We seek to support and validate internal valuation processes. Accordingly, we utilize the investor’s internal analytics to the maximum extent to ensure consistency.