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May 25, 2009

Past Issues

Column

A Blueprint for Mortgage Regulation

A recent article in the Washington Post noted that the Obama administration is engaged in active discussions to create a regulatory commission 'that would have broad authority to protect consumers who use financial products,' including mortgages. This story was reported a few days after the publication of a piece in the New York Times entitled 'My Personal Credit Crisis,' in which the author (Edmund Andrews, a Times economics reporter) outlined how his willingness to aggressively obtain financing for a home he couldn't afford led him to sabotage basic underwriting practices while driving himself into insolvency. (Basically, he violated a fundamental rule of self-preservation: 'When you find yourself in a hole, stop digging.')

ABS

The CLO Deep Discount Dilemma

In recent months, portfolio managers of cash flow CLO vehicles have been faced with the unenviable task of keeping their CLOs afloat in an environment in which bank loan prices in the global loan markets have declined to unprecedented levels. This task has become increasingly difficult, due in large part to certain provisions in the underlying CLO documentation that, in today's illiquid market, no longer operate as intended. At a time when it is more important than ever for managers to actively manage the credit risk in their CLO portfolios, CLO managers have suddenly found their hands tied by provisions that, while initially conceived to safeguard the credit quality of CLO portfolios, now serve as a disincentive for managers to replace credit impaired loans with stronger ones. This article will examine the dilemma confronting CLO managers who wish to improve their portfolios by trading rapidly deteriorating loans for better-performing so-called 'deep discount' loans.

Govt. Releases Incentives for Second Lien Program

At the end of April, the Obama administration announced modification incentives for second lien loans under the Hope for Homeowners program. Under the new incentives, when a Home Affordable Modification is started on a first lien, servicers that are part of the second lien program will automatically reduce payments on the associated second lien based on pre-set rules.

Govts. Clutch the Reins

Over the last year, laissez-faire has become seriously dated. Whether in the U.S., in Europe or even in some emerging markets, capital-market participants are now banking on their governments to bail them out. And as this month's ASR demonstrates, that once-maligned approach seems to be working. Although the results haven't been extraordinary, they've generated at least some equilibrium in the markets, both here and across the pond.

Global

Ray of Light: Can the U.S. and U.K. Govts. Restart ABS?

At the start of 2009, the formula that would save securitization began with government intervention. Six months down the line, the U.S. and European markets have seen some results. For Europe, the story has naturally been fragmented or on a country-by-country basis where some governments pledging more support than others.

Euro Countries Take Measures to Address Crisis

While much of the focus has been placed on U.S. and U.K. government initiatives, Continental Europe has also made strides to implement measures to alleviate the economic pressures on the market. In Germany, a draft bill recently passed aims to help banks transfer structured securities, such as ABS and CDOs, to a government-backed unit on a voluntary basis. The government plan would allow private banks to offload troubled assets to a special-purpose vehicle, with a 10% reduction in their booking value. In return, the banks will receive a government-guaranteed bond amounting to the transfer value of those assets.

ABS Market Recovery a Question of Timing

The deadlock regarding securitization activity in Europe still persists. While pressure on credit markets eased significantly since March, ABS spreads did not follow suit! Given the rapid pace of spread tightening and sentiment changes in the credit universe during the last couple of months, the jackpot question this spring from a credit risk perspective regards timing: Will the credit crisis fade sooner than anticipated or do markets face another bull trap? And will the ABS market keep its outcast status or will there be a rehabilitation? Asset backed securities have been impacted more than any other sector by the crisis. Having been at the center of the storm, this market has changed significantly during the last two years. First of all, public placements have practically become non-existent: This is due to unattractive issuance spread levels (average 'AAA' RMBS spreads over 2009 were quoted in areas above 300 to 400 basis points) as well as a prevailing lack of investors, especially for lower parts of the capital structure. As banks hardly had realistic alternatives to relatively attractive central bank repo refinancing, a flood of repo transactions occurred (E912 billion ($1.25 billion) 2008-2009 year-to-date). However, outstanding ABS volumes which were retained for central bank repo windows have started to flatten out.

IFC Takes a Look at Future Flows

On April 9, around the time the future-flow world was closely tracking troubled Kazakh banks, the International Finance Corp. (IFC) held an internal seminar on the product. Invited to speak were David McCaig, global head of securitization for Standard Bank; Jim Patti, a partner at Mayer Brown; and Greg Kabance, head of Latin America structured finance at Fitch Ratings.

The European Central Bank's Repo Facility for ABS

As the turmoil in global financial markets continues to affect financial institutions around the world, it is increasingly evident that the asset repurchase facilities provided by central banks have become a lifeline for banks struggling to raise capital in the current climate. In a market devoid of its traditional investor base, originators and arrangers of securitization transactions within the Eurozone have come to rely heavily on the European Central Bank's (ECB) asset repurchase or 'repo' facility which allows (among other assets) ABS to be used as collateral for funding. In contrast to the various U.S. facilities designed to restart the U.S. securitization market, the ECB facility is intended to allow financial institution holders of ABS access to short-term finance at (until recently) attractive rates, and has led increasing numbers of originators to structure, issue and retain their 'own-name' ABS specifically for the purpose of accessing the ECB's repo facility. Unsurprisingly, originators have flocked to the ECB in droves with newly-issued ABS over the past two years as funding conditions have deteriorated, creating a de facto 'lender of first resort' position for the ECB within Europe. This heavy reliance on the ECB's repo facility has inevitably led to a gradual tightening over the past eighteen months of the criteria by which the ECB assesses the eligibility of assets submitted as repo collateral and, in particular, the criteria applicable to ABS as 'eligible assets'.

Securitization and the Global Economic Crisis

In the current pantomime of financial regulatory turmoil, the villain of the piece is easily cast - securitization. Even the relative obscurity of the word has added to its perceived villainy. A difficult word to pronounce for the uninitiated, it has been booed and hissed at by politicians of all sides. The Turner Review, published on March 18, firmly places securitization - at least in its more complex forms - at the heart of the current banking crisis. But does it deserve its reputation?

Factors Affecting Performance in Euro CMBS

European commercial real estate and European CMBS continue to feel the effects of the events of last year when credit contraction, asset-value declines, and dislocation throughout the global financial systems began to show their effects in European CMBS through rising rates of loan defaults. This article looks at the performance of the market since 2008 and considers some factors that are likely to be relevant in 2009 and that we review, among others, as part of our credit analysis of securitized pools or our assessment of the counterparty risk in the transactions we rate (all statistics in the article refer to 2008 unless otherwise indicated).

ABS Totals

ABS Totals

View the year-to-date ABS issuance totals for ABS, MBS and CMBS.

ABS Manager Rankings

ABS Manager Rankings

View the year-to-date manager rankings for the different ABS sectors, including real estate, credit cards and autos.

Scorecards

Scorecards

View the Scorecard deals featured in ASR's Scorecard database.

Mortgage Refi Data

Mortgage Refi Data

See results from the Mortgage Banker's Associations Refinance and Purchase Indexes as well as the weekly mortgage rates surveyed by Freddie Mac.