Consensus for overall ABS issuance volumes for 2006 is steady as she goes.' Most expect the final tally to come in near $700 billion, and close to the 2005 total, assuming shifts in volume among classes. In any case, the backdrop to all the sectors will be closely tied to the consumer credit outlook. While consumers remain highly leveraged, and home values are soaring to all time highs, "both job growth and accumulated real estate and financial wealth will provide a cushion," said Ivan Gjaja, director and head of ABS research at Citigroup Global Markets. "We're unlikely to see a sharp deterioration."
There are also different outlooks for the various ABS sectors, including home equities, credit cards, autos and student loans
Is there a bubble in residential real estate? Arguments rage on, but either way the market will probably run out of steam to some extent. Slower home appreciation will translate into slower equity buildups. Interest rate direction is a massive question mark, and could dampen the sector. Gjaja foresees a flat to "modestly inverted" curve in the second half of 2006, resulting in a compressed spread between subprime floating and Libor rates, as subprime lenders raise rates to play catch up. However, HEL borrowers, who need financing, tend to be less rate-sensitive. Gjaja adds that usually higher interest rates lead to slower prepayments, and hence lower issuance for the next round.
"In addition, the upward move towards rationalization on mortgage rates was not entirely completed last year," said Quincy Tang, senior vice president RMBS at Dominion Bond Rating Service. "As lenders continue to increase mortgage rates in the coming months, origination volume will inevitably slow."
Various offsets will give comfort, and should help keep the sector relatively buoyant. "HELs should see robust financing, given that a large percentage of those borrowers hold short, adjustable-rate products that are due to reset in 2006," said Peter DiMartino, managing director at RBS Greenwich Capital. Lender sentiment also offers a ray of hope. DiMartino notes that lenders have been suggesting some bearishness on volume relative to a year ago. "The housing market likely won't turn in 2005-type numbers, but it is still healthy despite what you read in the newspapers."
DBRS' Tang also expects downward pressure on issuance volume to be partially offset by the continued proliferation of certain affordability products, such as longer IO's, more extended amortization terms, and higher LTV programs.
Consolidation in the industry may lead to slightly lower levels of issuance. Last year saw a number of mergers and acquisitions, such as Bank of America's purchase of MBNA, and Citigroup's digestion of Sears' credit card portfolio. "Players who would have been stand-alones before have now become part of superbanks," said Mark Adelson, head of structured finance research at Nomura Securities. These giant acquirers will have less need to tap the securitization markets. DiMartino observes that credit card master trusts headed lower, as cardholders have grown more reliant on home equity products. "Today's consumers better understand concepts like credit score, and try to improve their creditworthiness," he said.
Ford Motor Credit Co. and General Motors Acceptance Corp. are thanking their lucky stars for securitization markets, as the parent automakers struggle to turn profits. Both were heavily reliant on them in 2005, and will remain active participants in ABS, as secured financing proves attractive relative to the unsecured side.
Getting an education costs an arm and a leg these days, and higher tuition translates into issuance. The Deficit Omnibus Reconciliation Act of 2005, legislation enacted at the close of last year, should become effective by mid-2006. The bill raises annual loan limits for first and second year students. Meanwhile, loan consolidation should play less of a role going forward, as new incentives make that route less compelling.
The more off-the-run assets include all but the kitchen sink. "Investors have become more sophisticated, and are actively seeking to boost returns," said Gjaja, by turning to asset pools comprising intellectual property, insurance, timeshares, stranded assets and telecom cell towers.
Stranded assets should thrive now that political risk concerns have lifted. Nomura's Adelson thinks that the concept may be parlayed into other pioneer areas like pollution credits. Pharmaceutical royalty streams, a close cousin to music copyright and other intellectual property, have now proved themselves "doable," he said.
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