Securitization pros have had to constantly come up with new deal structures to respond to challenges posed by the ongoing financial crisis.
Nowhere is this more obvious than in CMBS. After a prolonged lull in issuance after the onset of the meltdown, CMBS 2.0 emerged in late 2009. But by February 2011, deals were getting more complex and leveraged. Some investors started to balk at the heightened risk.
So when S&P pulled its ratings on the $1.48 billion deal from Goldman Sachs and Citi in July, buysiders felt vindicated in their demands for higher credit enhancement. The deal had only 14.5% enhancement for the senior notes, even lower than the 2.0 standard of 17%-18%.
In her cover story on CMBS 3.0, Poonkulali Thangavelu says that this latest iteration of an old market is a response to capital structures that had gotten too aggressive. When the Goldman/Citi deal returned in September, enhancement levels were at 30%. That figure's setting the tone for 3.0.
While the private sector is tightening standards, the government is trying to loosen them, at least in the mortgage refinance department.
For one, it has modified its mortgage refinancing program called HARP to accommodate more underwater borrowers.
On Oct. 24 GSE regulator FHFA, along with Fannie Mae and Freddie Mac, announced significant changes to the government program, giving rise to HARP 2.0. Now more homeowners will be able to refinance their mortgages by become eligible for today's historically low interest rates.
Sally Runyan's story on HARP 2.0 quotes BofA Merrill analysts saying that the latest modifications return MBS to where it was before the crisis. Low documentation requirements; less focus on underlying loans' value; and more emphasis on faster loan processing - seems a bit like deja-vu.
Not all change, I guess, is for the best.
Along those lines, Bill Berliner says in his column this month that the government is off base in its efforts to solve the country's housing woes. He cited the HARP changes as examples of the government's pushing people to take advantage of the current low mortgage rates. Although helpful, Bill says these modifications miss the point.
An underappreciated threat to the mortgage and housing markets is the reliance of many American borrowers on low Libor rates. Many homeowners still have their ARM loans linked to either the six- or 12-months Libor.
The danger, Bill says, is when Libor rates start to significantly rise due to the European financial dislocation. This might, in turn, cause spreads between Libor and U.S. government rates to widen and push ARM rates up. As a result, some homeowners will get pinched.
Indeed U.S. government officials still have much to learn. Securitization experts at the recent ABS East 2011 said that the country's regulators should take a cue from their European counterparts. Lawmakers in Europe have simplified their application of risk retention rules and are now implementing it. By contrast, U.S. mortgage participants are still grappling with risk retention provisions such as the definition of QRM and the creation of the "premium capture" reserve fund.
Also covering a European story, Felipe Ossa drills down into talk that unpaid healthcare invoice might get securitized in Spain. At the euro equivalent of $13.8 billion, the volume is nothing to sneeze at, but there are serious hurdles for this to work or even be economically useful for Spain's regional governments, which are the obligors.
Felipe also shifts his gaze to an upstart: the offshore renminbi market in Hong Kong. Having only taken off last year, this arena just recently witnessed its first sukuk. This event, along with bank-guaranteed deals, suggests that other structured finance products may be in the cards.