From the early morning sessions to the wee morning hours, conversations at last week's ASF 2007 conference held in Las Vegas seemed to inevitably turn to subprime mortgages and the fate of ABS CDOs, among other things - such as the Miss America Pageant taking place down the strip.
Some people were adamant that CDOs backed by subprime collateral would implode, in the style of multisector CDOs, carrying manufactured housing loans and aircraft leases. In fact, one conference speaker went as far as to compare HEL securitization to Enron accounting. Others, however - mainly managers and underwriters - exuded nothing but confidence. The fact that Trust Company of the West's credit mortgage group had some 130 meetings set up in the span of a couple days supports the notion that even though investors may be requiring more yield, as one manager noted, they're not going away.
Continued innovation in CDO structuring to suit all tastes - from triggerless structures to high-grade lite to triple-A with leverage - is keeping money flowing in. Investor capital, and ironically money from those shorting the sector, are needed to keep it humming along. As many point out, the fueling of the CDO machine is what will ultimately provide subprime lenders enough money to refinance the borrowers in loans they couldn't afford otherwise.
"The most powerful linkage to the subprime space is to the CDOs," said Richard D'Albert, a managing director at Deutsche Bank Securities. Indeed, some say unwavering support from CDO investors could be what keeps the housing market in a soft landing scenario. "The thing that would affect all of us is a deterioration in confidence," said Louis Lucido, group managing director at TCW, speaking during Monday's opening session.
While a return to fundamentals is widely expected to trickle down to cash home equity pricing as is arguably occurring in synthetics - the ABX.HE 06-2 triple-B minus index plummeted below 90 for the first time last week - the most marked concern among market participants appears to be, as Lou mentioned, a sudden loss of confidence in the market.
CDOs are structured to handle a certain level of HEL credit deterioration, but some questioned whether they could handle the implications of widespread fraud. The deluge of early payment defaults, for example, led some market participants to question last week how many EPDs are masked until the expiration of reps and warranties. "Did securitization mean Enron for people?" asked Daniel Satchel, director of credit policy for State Street Global Advisors. "I think a lot of unscrupulous business practices will come out as the home equity loan market comes down, and I think it could draw a lot of unwarranted attention to this sector."
While the story of performance of HEL collateral and its ultimate impact on the ABS CDO sector is one that will have to unfold over time, one thing can be certain - ongoing debate on the topic will continue. The winner of this year's Miss America Pageant, however, will be announced on Sunday.
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