NEW YORK - Deutsche Bank Securities' ABS research team is predicting 4% overall growth in the sector over last year, with slowed issuance in mortgage related ABS, as interest rates creep up and home price appreciation slows.
"The ABS market continues to defy gravity," said research analyst Anthony Thompson, speaking at a media reception last week, citing last year's whopping $850 billion total and historically tight spreads. Thompson pointed out that last year was the first time that asset-backed issuance exceeded investment-grade corporate debt and high-yield debt issuance combined, buoyed by the incredible surge in home equity issuance.
"We would like to think we'll have some slowdown [in home equity issuance] in 2005," Thompson said, adding that there has been no sign of any slowdown so far. Thompson based his prediction for the home equity sector on the fact that with interest rates on the rise and home price appreciation on the wane, the incentive for cash-out refinancings will decline. Thompson closed his remarks on the home equity sector with an ominous note, "I have never seen a sector grow so heavily without a correction," he said.
Thompson pointed out another facet of the home-equity market of which people should be wary. He said that as the market for loan originations begins to slow, companies will start looking for other ways to continue their expansion. That will mean some combination of mergers, product innovation, and reaching lower into the credit scale. Thompson said a significant increase in any of those areas could cause his team to reevaluate its stable outlook for the sector. "Keep a close eye on rapidly growing servicers," he summed.
Demand still far outstrips supply in the overall asset-backed sector, as evidenced by the current tight spread levels. "Most sectors [of ABS] are operating on all six cylinders, but you can't find a lot of total return at this point," he said. Much of the reason for those levels is CDO demand, which Thompson expects to cool to some degree this year. He noted also that downgrade-to-upgrade ratios were about the same for CDOs and ABS, at 1.4 and 1.5 respectively, representing sharp change from the previous four years, in which CDOs experienced far more downgrades than ABS, peaking at 23.9 downgrades to every upgrade for CDOs, versus 1.3 for ABS in 2001.
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