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MBS

A Blueprint for Mortgage Regulation

May 25, 2009 - 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.')

Euro Countries Take Measures to Address Crisis

May 25, 2009 - 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.

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

May 25, 2009 - 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.

ABS Market Recovery a Question of Timing

May 25, 2009 - 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.

The European Central Bank's Repo Facility for ABS

May 25, 2009 - 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'.

Factors Affecting Performance in Euro CMBS

May 25, 2009 - 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).

Govt. Releases Incentives for Second Lien Program

May 25, 2009 - 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

May 25, 2009 - 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.

Risk Mismanagement

May 4, 2009 - The necessary post-mortem analyses for the financial system's collapse have begun in earnest. While some have taken to talking about Wall Street's 'stupidity,' this is an unsatisfying and ultimately counterproductive approach. Clearly, the financial crisis had numerous major and contributing causes (the true 'perfect storm'), but failures of models and analytics were key factors. Rather than think of 'models' as a singular entity, it's useful to separate them into 'consumer behavior' and 'position management' models. The first would include credit performance models, which predicted losses that were low by several orders of magnitude. The failure to correctly project credit-related losses led directly to a cascading series of problems, including the creation of entire classes of securities (such as CDOs backed by subprime subordinate bonds) that were fundamentally flawed.

The Only Game In Town

May 4, 2009 - Critics can say what they want about TALF. But, as clearly demonstrated by the articles in this month's ASR, the program is still the only game in town, at least for U.S. ABS.

Bell Bridges the Gap Between Investors and Borrowers

May 4, 2009 - The European real estate market's lack of liquidity is as much a result of the disappearance of competent intermediaries as it is of the credit crisis. What the market needs, said Robert Bell, founder of Bell Capital Partners, is financiers who can, on the one hand, structure and execute financings and, on the other, coordinate groups of interested investors into syndicates that can fund these financings.

Fewer Traumas for Italy's More Conservative Mortgage Market

May 4, 2009 - Italy's more conservative approach to lending has resulted in the country's housing market withstanding the current economic environment, unlike neighboring European countries. This has also preserved the fundamentals of securitization structures. According to Fitch Ratings, Italy represents one of the most important RMBS markets in Europe, with a market share of 6% by issuance size and 9% by number of deals in 2007. During this year, RMBS continued to represent the Italian securitization market's main asset class in terms of volume and number of deals, at 64% and 48%, respectively.

Near-Term Prepayment Outlook on Agency MBS

May 4, 2009 - Refinancing response has been relatively muted relative to the historically low mortgage rate levels that the market has been seeing lately. The Mortgage Bankers Association's Refinance Index in the week ending April 17 was at 6,541 with the 30-year fixed mortgage rate at 4.82%, according to Freddie Mac.

European CMBS: A Landscape Readying for More Defaults

March 30, 2009 - Although refinancing risk for European CMBS deals is expected in another couple of years, market sources said that a more immediate concern for bondholders is the alarming rate of tenant defaults. James Zanesi, an analyst at Unicredit, said that in 2009 the bank has monitored 47 downgrades in U.K. CMBS and 15 downgrades in other European deals (versus only two upgrades in Victoria Funding (EMC III) Plc).

Proposed FASB Changes

March 30, 2009 - The release of the Treasury's plan for public-private investment funds (PPIFs) has received substantial attention and triggered a huge rally in financial stocks. However, the proposed changes in accounting rules by the Financial Accounting Standards Board (FASB) may have a more significant and lasting impact on the financial system. While they risk making financial statements even more opaque, the accounting changes, if approved, should serve to limit the debilitating cycles of write-downs and capital depletions that continue to plague the financial sector. The first proposal (a modification of FAS 157) allows firms to determine whether a market price is 'associated with a distressed transaction' for valuation purposes. If the subject transaction is judged to be distressed, the institution can use alternative valuation methodologies to either adjust the quoted price of the security or, in some cases, ignore the market price entirely.