There’s greater alignment of interest now between those who issue asset-backeds and those who invest in them, thanks to investors doing more homework, greater loan-level disclosure and regulations, said panelists at IMN’s ABS East conference.
But risks are still creeping up, particularly in sectors seeing looser underwriting, such as commercial mortage-backeds (CMBS).
Risk retention has added a degree of comfort but investors are also “digging deeper,” according to Susan DiCicco, a partner at Morgan, Lewis and Bockius.
“We have investors that make clear that they’ll enforce their rights,” she said, a change from the more laissez faire approach by the buyside in the run-up to the bubble.
Frank Serravalli, lead partner at PWC, said many of his clients had “embraced” regulations, and noted that it in the auto-loan space, risk retention rules have lead to “simplified structures.”
Not everyone saw alignment as the securitization market's new strong suit.
In the arena of bonds backed by private label mortgages, which remains a fraction of its pre-crisis size, Doubleline Group’s Global Sales Manager Vincent Fiorillo, sounded a note of skepticism that investors and issuers feel they have skin in the same game.
A chart from the Urban Institute showed just how tough it will be for the private label market to reach higher origination levels with the dominance of Fannie Mae- and Freddie Mac-guaranteed loans and Ginne Mae-originated loans.
In Q2 2015, Ginne Mae accounted for 34% of loans; Fannie and Freddie, for 65%; and private label, 1%.
Investors at least appear to be more comfortable with risk they’re taking on in Fannie and Freddie deals, which includes risk-sharing transactions. Far more loan disclosure is helping.
Before the crisis, “it was very hard for investors to know what’s going on at the individual loan level,” said Sean Becketti, chief economist at Freddie Mac.
Another big issue for participants is deteriorating credit quality in some sectors, although delinquencies remain at historically low levels.
The CMBS market epitomizes this trend.
There’s higher credit enhancement and less interest-only mortgages than during the height of excess in 2007, but a clear move towards relaxing standards.
“The pace of deteriorating…is somewhat troubling,” said Bob Behal, co-head of ABS/CMBS investments at Vanguard Group, who also pointed out that property values in many areas are back to pre-crisis levels. “I worry about that a little bit,” he added.
