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December 7, 2009

Past Issues

Column

Option ARMs and the "Time Bomb"

Fears are growing of a renewed surge in defaults on option ARMs (OAs). Investors have increasingly expressed concern that a spike in defaults driven by mandatory payment recalculations (the recast "time bomb") is building for the roughly $100 billion unpaid balance of 2006-issue loans, and question whether modifications under the Home Affordable Modification Program (HAMP) can be used to help significant numbers of troubled OA borrowers. A review of this complex product's features will be helpful. The initial payment is calculated to fully amortize over the loan's term at a low "start" rate (typically 1.5%). Accrued interest is subsequently calculated at a fully-indexed rate of 12-month MTA plus a margin (usually 300-350 basis points). For a pre-designated period of time (either 60 or 120 months after issuance), the borrower can make a minimum payment, i.e. the initial payment subject to 7.5% annual increases. If a monthly payment is less than the interest-only payment (based on the fully-indexed rate), the difference is added to the loan's balance (i.e., "negative amortization"); otherwise, the difference is treated as amortization. The loan is recast either at the end of the minimum payment period, or if its balance increases to a negative amortization limit (typically 115% of the loan's original balance). After the recast, the loan becomes an annual-reset ARM, with payments determined by the fully-indexed rate and remaining term.

ABS

When Ignorance Is Not Bliss

The financial crisis has brought a renewed consciousness to ABS investors - they need to get to the nitty-gritty of what they own. Nora Colomer's article this month focuses on this very issue. Various securitization information providers have developed technology to make sense of all the granular data available. The aim is to increase transparency in ABS deals.

Fitch: U.S. Structured Finance at a Crossroad in 2010

Overview Even though the U.S. economy appears to be on a path toward recovery (albeit a slow one), Fitch Ratings expects weaker collateral performance across all structured finance sectors next year. Fitch expects the pace of downgrades to slow in areas such as RMBS, CMBS and CDOs given the magnitude of ratings downgrades and the prospective stresses built into the actions taken to-date. At the same time, sectors that have remained resistant to the downturn (consumer ABS) will likely see more negative pressure on collateral and, potentially, ratings on a relative basis, as fundamental improvement to key aspects of consumer health remain elusive.

Retention Rules Might Not Be Best Alternative, Experts Say

The House of Representatives is set to debate and vote on its regulatory reform package this week. The proposed legislation includes several bills that address issues important to securitization, including the risk retention on sales and securitizations of mortgages. A similar proposal is also pending in the Senate dealing with this "skin in the game" issue.

Highland Looking to Launch New Loan Funds

Highland Capital Management is working on an array of loan-focused funds that it hopes to launch at the beginning of 2010. One of these is a credit opportunity fund that will invest mostly in senior secured loans, secondary loans and possibly distressed loans. That fund will be managed by Highland cofounder Mark Okada and partner Paul Kauffman.

Credit Card ABS Issuance Awaits New Rules, Especially for Sub Pieces

Issuance of top-rated credit card ABS has picked up this year, but investors have faced a dearth of subordinated tranches until GE Capital's $76 million Class B five-year tranche priced Nov. 25 at 285 basis points over mid-swaps, setting a benchmark for more issues. Investors eager for more of the relatively lucrative paper, however, might be disappointed. This is at least until regulatory and accounting issues are resolved, and even then, many credit issuers may simply not need the financing.

MBS

Prepare for Fed Exit and Higher Rates, Analysts Warn

This year, mortgages have done very well courtesy of the substantial buying from the Federal Reserve. Year to date, gross issuance has totaled $1.5 trillion with net issuance at just under $500 billion, while the Fed has bought $1.04 trillion through Nov. 25 and the Treasury has taken a $112 billion share through October.

Global

Talk of New European Deal Could Signal Euro ABS Revival

The recent uptick in primary, non-retained issuance in Europe could be more than just a one-off event. A new Dutch RMBS deal means that Europe has taken another important step toward revitalizing its securitization market.

Gulf ABS Not a Clear Loser in Dubai Fallout

The destabilizing news out of Dubai is inarguably a negative for issuers out of the region - what many investors effectively saw as implicit sovereign support has now vanished. But the impact for true asset-backeds in the United Arab Emirates and neighboring countries is perhaps more nuanced. In the short term, it could hurt the few existing deals, as indeed it has already sparked negative ratings actions for some. But it might also shift the economics of financing in the region to the benefit of ABS.

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.