Subprime lender Novastar Financial Corp. took a $4 million loss in the fourth quarter related to its first CDO issuance. The loss was a public example of what a number of market participants are speculating about - that CDO issuers are being stung by mark-to-market losses on collateral sitting inside warehouse lines. While the Kansas City-based lender plans to move forward with plans for regular CDO issuance, the combination of volatility within cash home equity securities, wider CDO liabilities and the specter of more restrictive warehouse lines has some thinking the ABS CDO machine could be seeing a slowdown.
Several sources last week were predicting less issuance in ABS CDOs, as investors have started to ask for more yield in return for the level of risk they perceive within the sector. Paired with falling cash values, that scenario is a significant divergence from the favorable environment that ABS CDO managers have experienced over the last several years.