If it's true that Bank of America will securitize its entire performing $21 billion EquiCredit portfolio over the next three quarters, the home-equity market could be in for some serious spread dislocation, analysts said.
"I think they're nuts," said Dan Castro, head of ABS research at Merrill Lynch. "There's no way they can do $20 billion-plus of securitization in nine months, the market couldn't absorb it. Best case, they could maybe do half that much, a billion a month, and the market chokes on it a little bit, but doesn't pass out."
Other analysts agree, saying that BofA would be foolish to sell off its portfolio in a distressed fashion. According to a filing with the Securities & Exchange Commission, the bank will securitize the portfolio onto its balance sheet before selling the bonds into the market opportunistically.
"If you viewed the whole mortgage-related market, a couple of billion a month is not that overwhelming, but because it's home-equity, that's a lot," another bank analyst said. The analyst pointed out that BofA could be considering whole loan sales as well, although there's no indication of that in the 8-K filing.
In a conference call, a company spokesman said BofA currently has a $26 billion portfolio of subprime loans associated with EquiCredit, $22 billion of which are unsecuritized. An insider at BofA said that the portfolio to be securitized and sold is closer to $20 billion, and that the time frame is closer to a year than seven-to-nine months, despite what the company had announced. BofA has not securitized any of the EquiCredit portfolio in over a year.
"We are not going to just dump this into the market, and there hasn't been an EquiCredit deal in almost two years so it isn't like there is a glut of this paper in the market right now anyway," the source said.
BofA acquired EquiCredit when it merged with NationsBanc Montgomery Brown, which had acquired EquiCredit when it acquired Barnett Bank.
BofA's portfolio is likely to be evenly split fixed-rate/floating rate, as is most of the market. The issuance would put heavy pressure on home equity spreads. Issuance in home equity has averaged $15 billion to $18 billion per quarter over the past few years.
"It actually makes it difficult for all the issuers," Merrill's Castro said. "It's not just their paper that will trade wider, it's everyone's paper."
This much-increased issuance could essentially be untested grounds for the market, analysts said. The much talked about CDO sub-bond bid will only be able to take in so much of the supply before reaching issuer concentration barriers.
In context, Ford Motor Credit has been one of the largest issuers over the last few years, nearing $15 billion annually. Autos, however, are considered highly liquid and very safe, although if Ford were to do $20 billion in seven-to-nine months, it's likely that the issuer would face over-saturation problems.
The long-term impact, analysts said, is that a significant lender in autos and home equity is no longer going to be a player in the market. From the issuers' perspective, there may be less pricing pressure on the origination side.
BofA also said it plans to sell its mortgage servicing business, and has already secured two buyers for its origination network. The bank will take a $1.25 billion charge to earnings in the third quarter. The move comes approximately one year after rival bank First Union shut down The Money Store unit.