Bear Stearns analysts last week refuted claims that the current turmoil in the subprime mortgage market would result in ABS CDO blowups similar to those experienced years ago from losses on manufactured housing loans and high yield bonds.
Past defaults in both the manufactured housing and high yield bond sectors were more systemic in nature, and CDO structural features are currently in place to protect against collateral defaults more effectively than in the past, Bear analysts argued.
Some mortgage warehouse lines that had been on hold began to accept new securities last week, sources said, as asset spreads were hard to ignore and deals had been experiencing relatively decent pricing. While few seem to hold the opinion that there will be a full retraction of credit to ABS CDOs, deal flow in the sector is largely expected to abate from the pace experienced in the first two months of this year.
"Fears around a potential catastrophic withdrawal of credit to the subprime mortgage space and the ABS CDO sector might be a bit far-fetched," Bear analysts wrote. "The deterioration in performance in subprime mortgages should see a repricing of risk across the capital structure, but the presence of reasonable subordination, especially to the senior classes, and the absence of a systemic downturn in the housing market and the U.S. economy should imply a reversion to the normal state of affairs once the negative sentiment stemming from the current shakeout in the mortgage sector subsides."
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