With the securitization markets currently broken, market participants are trying to find their way through the crisis and pick up the pieces. This was evident in last week's American Securitization Forum (ASF) gathering held in Las Vegas.
Conference attendees were aware of the current dire state of the market and remained uncertain as to the future of the ABS business.
In his opening remarks, newly installed ASF Chairman and Natixis Managing Director Ralph Daloisio said that the current crisis "painfully revealed" weaknesses in the securitization market.
In the 2009 Market Outlook panel, speaker Paul Colonna, president and CIO in fixed income at GE Asset Management, explained that it's a "time of transition in the securitization market"where there's a "virtual shutdown" of the non-agency mortgage sector. These circumstances, Colonna said, present challenges to business models that various market participants have used, including originators and servicers, among others.
However, he remains optimistic. It's a question of "when the securitization markets will return and not if they do," Colonna said.
The government has certainly given the market some reason to hope. "The level of government intervention is unprecedented," said T. Timothy Ryan, president and CEO of the Securities Industry and Financial Markets Association (SIFMA). Government response - which Ryan described as comprehensive and targeted, although at times moving from one objective to another - has stabilized the financial sector.
However, there remain threats on the horizon, which include the bankruptcy cram-down legislation that is aimed at preventing foreclosures. Tom Marano, chairman and CEO at ResCap, said that this bill could fall victim to the law of unintended consequences, and could cost losses to securitization trusts.
"Investors have become skittish," said Sanjeev Handa, head of global public markets at TIAA-CREF. Handa said that these rules could hurt investors in the future and could have a material impact on the availability of credit as buyers might stay away from levered pools of mortgages, taking these risks into account.
Investors have also started to price in various levels of worst-case scenarios. Colonna said that a permanent risk premium has been priced in as part of modeling heavy government intervention.
Pricing Uncertainty
Uncertainty in the market is exacerbated by the lack of details known about the government programs that have been announced and implemented. At what pricing levels, for instance, is the government going to buy assets? "There's more to come - the devil's in the details," said a panelist regarding the government's role in the securitization market.
For instance, the expanded Term ABS Loan Facility (TALF) that was announced on Tuesday, panelists said, might cause pricing dislocation in the secondary ABS market. With unlevered assets available via the TALF program, "the toxic stuff might not look as attractive," said Dan Castro, chief risk officer at Huxley Capital Management, when he spoke at the investors' roundtable. Other attendees also warned against the possible tiering that could occur between TALF and non-TALF transactions on the primary front.
At the 2009 Market Outlook panel, participants discussed the problem caused by the government buying assets for which prices are not transparent. "Once these assets move, how are these going to be priced?" asked Handa. Pricing, he said, is usually based on "the sum of all deals priced previously."
The development, panelists said, of an over-the-counter market for these complex securities is going to be hard, especially since the market is undercapitalized right now.
This is why pricing transparency becomes especially crucial at this juncture.
Aside from pricing transparency, panelists discussed other key steps to rebuild the market in a panel led by Tom Deutsch, deputy executive director at the ASF.
Speaker Mary Kane, a director at Citigroup Global Markets, referenced a report she wrote previously that outlined a six-pronged approach to restart the market: 1) cleaning up the system to enable healthy financial institutions to start lending again, 2) restoring ratings creditability, 3) bolstering the securitized products structures by issuers retaining residuals and, in some cases, by placing additional credit enhancement on deals, 4) simplifying and creating transparent products, 5) addressing regulatory and accounting uncertainty by coming out with explicit guidance needed that suggests that mark-to-model valuations are acceptable in "inactive" markets and 6) restoring demand.
Basically, market participants agree that there's only one solution: going back to basics. As Huxley's Castro aptly said at the risk managers' roundtable: "If you don't get the collateral right, nothing is going to protect you - the structure won't."
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