One could argue that investor sentiment toward subprime mortgages has become more optimistic in recent weeks. HEL spreads have tightened in the secondary and synthetic markets - and some new-issue deals have actually been over-subscribed.

Yet at last week's Information Management Network Spring ABS 2007 in Miami Beach, there was much speculation as to how market participants truly felt about subprime collateral. Do some truly believe that HEL fundamentals are bound to improve after the early defaults are weeded out - or are they simply looking to cleanse their own balance sheets of the product at a reasonable price?

Rumors circulated that speakers in a panel concerning the subprime market apparently grew timid when a television camera appeared at the back of the room. According to sources who attended the session, the speakers turned their name tags around in order to hide their identities.

Either they were simply camera shy or they were bashful about discussing relative value in the current subprime mortgage market, one source scoffed. This line of thinking epitomized a common theme circulating along with the alcohol at the conference: Aside from cases of ridiculously low pricing, is anyone capable of determining where value lies in subprime collateral yet?

Some felt strongly that there was too little performance data behind 2006 HEL product to model how the loans will behave years down the road - particularly when they hit their reset dates. To these observers, it was irresponsible to assume the Street has its "arms around the problem" of subprime credit performance to a degree that would merit selling the securities at prices higher than recent trading.

As the old saying goes - there is no bad bond, only a bad price. But will market technicals allow the appropriate pricing to emerge?

"In this market, which is technically driven, it is hard to find value," said Kishore Yalamanchili, a managing director at Blackrock, speaking during a panel discussion. "Already we are seeing some tightening in spreads."

According to some investors, the rapid deterioration seen in subprime second liens could be a taste of things to come for the rest of the subprime sector. "I think it is natural to expect that first-lien deals will follow the path of second liens," a sector where only triple-A and double-A securities are actively trading, said Jeff Humphrey, an analyst at United Capital Markets. In fact, the firm recently bought triple-A rated subprime second-lien securities priced "in the low nineties."

Yet increasing credit enhancement and fewer "risky" loans paint a rosier picture for new issue deals, some speakers said. "We like the way the market has changed over the last few months, both in credit enhancement and deal attributes," said Paul Norris, director of mortgage portfolio at Fannie Mae.

And for older deals? According to one speaker, it's possible the rash of early payment defaults will result in a cleansing of sorts, leading to collateral that should perform in line with earlier vintages.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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