BOCA RATON, FLA - With a record 2,600 delegates in attendance, Information Management Network hosted its tenth annual ABS East conference last week. While the rest of the country was gripped by the run-up to the election, securitization players descended on balmy Boca Raton to focus on issues particular to them. High on the agenda were persistently compressed spreads, the boom in alternative mortgage products in a rising interest rate environment, and tighter scrutiny from regulators.
Many on the opening panel admitted being surprised at how tight spreads have remained throughout the year, as fresh supply continues setting records. A number of panelists cited the housing market as a potential trigger for future spread widening.
Michelle Russell-Dowe, portfolio manager at Hyperion Capital Management, noted how the growth in alternative mortgage loans - a major ingredient in driving up housing prices in recent years - "was not a permanent factor" in keeping spreads tight going forward.
SG Corporate & Investment Banking Global Head of Securitization Greg Medcraft countered that new sources of demand for ABS product globally and domestically have held spreads at current levels. He pointed to increased portfolio allocations, rejuvenated demand from CDOs and overseas demand as primary liquidity sources. "In 2005 demand should remain strong," Medcraft said.
All panelists recognized that the spread environment could be altered by an unforeseen event, be it market specific or geopolitical.
Tackling other issues, Lehman Brothers Managing Director and securitization chief Nelson Soares said that investor focus has shifted away from underlying credit and to the seller/servicer. This raised another burning topic: issuer transparency.
Compared to other securitization markets, namely CMBS, Western Asset Management Portfolio Manager Ron Mass said ABS was lacking in specific loan data disseminated to investors. "A CMBS deal comes with the loan tape already run," while ABS data is typically average pool performance. Mass added that there should be standardized loan level data reported to investors, but the willingness to do so varies by industry.
This was something that State Street Global Advisors principal Dan Statchel acknowledged was variable from issuer to issuer. In his view, the lack of consistency was disappointing. "Credit card ABS is sold based on historical data," he said, suggesting that the current particularities of each deal's pool do not play as large a role.
United Capital Markets President John Devaney uncharacteristically concurred, noting that as pool size increases, loan level reporting and analysis becomes more complex.
Devaney did add that regulators, namely the Securities and Exchange Commission, were watching disclosure closely. He foresees an environment in which bankers will diligently disclose offering memorandums and remittance reports and servicers will increase reporting efforts across the board.
"There is a major trend for increased disclosure from regulators. We have had hours of conversation with the SEC over secondary market transparency," said Devaney. "All of a sudden the SEC has become extremely involved."
Overall, panelists were adjusting to the heightened regulatory scrutiny in a realization that it isn't likely to go away. "Reg AB - the first SEC regulation focused solely on ABS - while postponed, will pick up in 2005," said State Street's Statchel.
Hitting an election-year note, MBNA Corp. CFO Vernon Wright made a stark reference to lingering disclosure problems: "Are there hanging chads out there? Yes, but fewer than four years ago." MBNA, for example, has increased disclosure in its prospectuses this year and the American Securitization Forum is currently addressing the issue with regulators from both issuer and investor perspectives, Wright noted.
Meanwhile, Hyperion's Russell-Dowe offered some blunt buyside advice to issuers. If you don't offer greater disclosure and reporting or a track record of honesty, "we won't play with you."
Unlike recent IMN conferences, the trustee representative, JPMorgan Chase senior vice president Joe Giordano - who had taken to wearing a football helmet in past gatherings for protection - largely got a pass from his fellow panelists this time around. He did, however, propose that trustees be allowed to take a more proactive role throughout the life of a transaction.
Specifically Giordano pitched the idea of a "trustee trigger event," similar to what occurs when a servicer reports performance data that breaches covenants, allowing the trustee to step in preemptively.
The morning's second panel focused on the market conditions forecast for the coming year. An informal poll showed that panelists expect a number of asset classes to increase in volume next year, although a decline in home equity ABS should lead to overall supply leveling off or declining compared to 2003.
The sectors projected to spike the most include credit cards and student loans, while auto ABS should slip from its relatively modest 2003 supply numbers. Student loan ABS, up significantly in 2003, should enjoy strong expansion next year in the private loan sector.
As for home equity, origination growth has been maintained over the year via lenders offering alternative mortgage product, but Alliance Capital Management Senior Vice President Bill Sidford doesn't think lenders "have another trick up their sleeve" to maintain originations.
Most of his fellow panelists agreed with Sidford's assessment, as most predicted trouble for the largest sector of the market next year. Five of the eight panelists believed the home equity sector was the leading candidate for trouble in 2005. One panelist, Craig Platt, senior vice president at KeyBank, estimated an 80% chance that the sector experience a hiccup next year.
ABN AMRO Managing Director Bill Haley, who also picked home equity as the leading sector marked for bad times, said increased competition among underwriters could compromise loan underwriting standards. He also expressed concerns over home price valuations.
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