Over the past week, several investment banks began hosting situation room' type sessions to begin reckoning the damage to the subprime industry and the industry's prospects for the rest of the year. The mood among many analysts, investors and other market professionals was unquestionably downcast - and somewhat humbled - at press time.
For instance, Bear Stearns hosted a luncheon on March 9, during which participants observed that the present situation feels like a crisis because the industry is repricing very quickly over a matter of a couple of weeks, and that many macroeconomic issues surrounding the housing sector have gotten expressed in the latest ABX.HE index.
"There has been a somewhat unhealthy fixation on the HPA as a driver (of models and pool performances)," an industry expert said. "As (we) use the models, we have to have a good degree of humility."
Yes, humility aptly described the ABS market's state of mind as pricings edged up to an expected $10 billion week. Credit Suisse analysts opined that New Century's escalating problems had put it - and possibly much of the subprime mortgage market "On the Edge of the Precipice".
"Given the perilous state of the subprime market, our original prediction of subprime lenders being reduced by half seems optimistic," according to Credit Suisse analysts who wrote about New Century's latest 8-K filings last week. "We now expect few independent subprime originators can survive. Serendipity now will be the primary determining factor for those surviving."
The investor market went on to eye several HEL deals that priced on the day with implacable suspicion. Merrill Lynch's Specialty Underwriting and Residential Finance did not surf its way to the same type of pricing such an issue might have enjoyed last year. The issue offered one-year triple-A portion, priced at 12 basis points over the one-month Libor, and its two-year tranche priced at a remarkable 91 basis points over the benchmark. The eponymous Citigroup Mortgage Loan Trust did a little better with its two-year notes, which priced at 15 basis points over the one-month Libor. Credit Suisse's Home Equity Asset Trust priced its three-year notes at 24 basis points over the one-month Libor.
The auto sector offered the Long Beach Auto Receivables Trust. Brought to market by RBS Greenwich Capital, the short-term piece priced at two points under the three-month Libor, while its triple-A rated, 3.36-year tranche priced at 20 basis points over swaps.
Some market participants are now wondering whether the current problems were technical and idiosyncratic in nature, or if they were a consequence of systemic weaknesses in the mortgage business. Indeed, some have observed that the barriers to entry in the front-line mortgage origination business are very low. For the past 15 years, the mortgage industry has not created the very best vintages, a source said.
The burning question, sources said, is whether a situation has been created where there's volatility in the underlyings. And as one market participant aptly stated, "This is not just about the loan quality. If people want to make bad loans, they will be able to do it."
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