With 64 investors in attendance, UBS Warburg hosted a one-day home-equity crash course last week, bringing to the podium four of the sector's largest issues. Among other concerns, the issuers discussed lender competition challenges that will face the industry in the coming year.
Sounding off on their strategies going forward were officials from AmeriQuest Mortgage, Long Beach Mortgage, New Century Financial and Option One Mortgage.
The event also showcased a research roundup, with UBS's top analysts arguing that the sector is currently cheap, especially for subordinated home-equity ABS, which represents a good buy opportunity for investors, they said.
Kicked off by UBS Managing Director Shahid Quraishi, the beginning of the gathering was a focus on borrower credit quality and the performance of subordinated classes in home equity ABS. "The biggest challenge right now, for underwriters and issuers, is selling triple-B and triple-B minus rated bonds. And for the top lenders in the industry, performance has been stable," said Quraishi.
Look for UBS Warburg to host similar events on a semi-annual basis, according to Quraishi, who notes "this forum is an efficient way for investors to express their concerns to issuers."
Executive Director of research Tom Zimmerman then outlined why issuers' ability (or lack thereof) to manage growth responsibly will determine the health and well-being of the industry going forward. He noted that most of the mitigating factors facing real-estate ABS issuers - such as underwriting standards and servicing platform quality - are in the lender's hands. But, he cautioned, issuers do not control any of the issues facing the economy as a whole, primarily interest rates, unemployment and housing prices.
Some issuers may be in trouble, according to Zimmerman, if they do not fully understand the market risks facing them and thus push too aggressively for market share. Noting the recent troubles in subprime credit cards and manufactured housing, Zimmerman echoed the common theme that issuers should avoid growing at the expense of underwriting standards.
All four issuers present echoed this advice. Some of the growth strategies differed slightly, despite the fact that the refinancing wave - responsible for the majority of originations over the past two years - may be over. With all four California-based lenders focused on the subprime borrower, the expansions will be twofold: into new geographic regions as well as a focus on higher-FICO borrowers.
Option One plans growth primarily through a migration into higher FICO borrowers, said CFO Bill O'Neill. Current weighted average FICO sits at 603, 37.4% of which is 620 or higher. The move up in credit will be seen in Alt-A product, focusing on both limited documentation and higher debt-to-income ratio borrowers. Geographic expansion is also in the plans, but to a lesser extent. O'Neill points out that with sub 1% concentrations in 27 states, Option One has room to grow throughout the Midwest and West.
AmeriQuest grew its portfolio through the whole-loan market last year, as wholesale purchase made up 27% of its portfolio, according to Ketan Parakh in the capital markets group at AmeriQuest. This is expected to remain constant in 2003. Expansion plans are also focused on a move into the higher-credit Alt-A segment, although on a retail-only basis. In addition to eliminating no-FICO loans, AmeriQuest has raised its minimum loan size to $60,000.
After re-entering the servicing aspect of business in January 2002, New Century is on track to rejoin its pier group. New Century will grow primarily via expanding into the East Coast, said Pat Flanaghan, president of wholesale operations at the company. New Century is originating loans in Georgia, but not "high cost of recovery" or section 32 loans. Additionally, it is evaluating whether or not to originate loans in Georgia.
To boost higher-credit borrowers, Long Beach has begun using Fannie Mae's desktop underwriting software - the only subprime borrower known to do so. This will allow Long Beach to assess the credit quality of a borrower much faster than a competitor, notes Andy Sciandra, manager of capital markets - in under 30 seconds in most cases. Additionally, seemingly unfazed by the GFLA law that takes effect in Georgia Feb. 1, Long Beach supports predatory lending legislation and will continue lending in Georgia and New York, although it may not securitize those loans.
Despite mortgage rates being at 30-year lows (30-year fixed at 5.90%; 15-year fixed-rate at 5.28%, according to Freddie Mac) the extreme competition among lenders should keep rates low throughout the year, investors in attendance said.