New York - Tighter underwriting was the catch phrase at the American Securitization Forum's annual conference last Wednesday. Market participants called for more stringent lending standards, increased market transparency and more attention to loan modifications to mitigate potential defaults in the subprime loan market.

The mortgage securitization industry is caught between a rock and a hard place, many agreed.

"The market is getting slammed for not making adequate loans but also being criticized for having too much credit," said Mark Lackritz, president of the Securities Industry and Financial Markets Association. "We are looking for a Goldilocks scenario, a balance of the two...We need national standards in order to level the playing field."

Panelists not only called for quality enhancement through compensation programs and mortgage staff training, but they also stressed the need for alteration of the underwriting standards, with loan documentation moving away from stated income and toward full documentation.

And it seems the market is receptive. In early 2006, the percentage of mortgages with stated income were at 50% to 60%, said panelist Bill Longbrake, vice chair of Washington Mutual. But, in early 2007, the number fell to 32% and it will fall even further this year, he added.

However, issuance in the subprime lending market has also declined as a result of tighter underwriting and investors exiting the market, panelists cautioned. And there is less subprime product, said Diane Wold, managing director at GMAC-ResCap.

Indeed, in 2006, subprime issuance was at $640 million, Longbrake said. And the number is expected to decline 47% to approximately $350 million in 2007. Alt-A issuance is also tightening with volume down one-third from 2006, Wold said.

Also down is CDO investment in the subprime product, Wold added.

But slowing issuance may only be a short blip on the market. "We are in the early inning of problems, but mortgage shops that were in trouble have closed, and securitizations are still getting done," said Charles Scully, managing director at MetLife. "We will have to wait and see how the 2005 and 2006 vintages play out since the collateral pools are not that much different than they are now," he said.

Until then, however, conference delegates speculated that loan modifications might be the brace the market needs to heal. This is particularly true as interest rates reset in the currently higher interest rate environment with slowing home price appreciation, especially in California, Wold noted.

But while the market is focused on loan modifications, participants are still a little bit skittish.

"We do not know what is going to happen," Wold said.

Easing some of the market's concern is a recent report from Moody's Investors Service. The rating agency reviewed the governing documents for the subprime securitizations that it rated in 2006. It found that roughly 95% of the transactions permitted loans to be modified, many of those transactions limited the number of loans whose covenants could be updated.

The most prevalent type of modification would be interest rate modifications on 2/28 and 3/27 hybrid loans at the time of their initial interest rate reset, Moody's said. Other modifications include an interest rate reduction, the conversion of the rate from an adjustable to a fixed, the reduction in the principal owed, forgiveness of past due amounts, an extension of the amortization term and/or the loan maturity, and the capitalization of past due amounts over the remaining term of the loan, Moody's said.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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