While many issuers have avoided the high loan-to-value market following last year's liquidity crisis, Minneapolis-based General Motors Acceptance Corp.-Residential Funding Corp. has stood it's ground, emerging as one of the most powerful and dedicated players in the business.
With the goal of completing an ambitious $2 billion of high loan-to-value securitization for 1999 - and increasing that amount even further after the millennium - the company last week completed a $560 million offering and expects to issue another high-LTV transaction for between $600 million and $650 million before year-end, company officials say.
Jeff Detwiler, GMAC-RFC's managing director for the securitization business, said that his group expects to continue issuing high-LTV securitizations quarterly and is "on target" to achieve its goal of issuing a total $2 billion of the securities by the end of the year. The timing and size of the fourth-quarter deal will depend on how the market responds to year-end issues, such as Y2K, he explained.
"With the big fallout in the finance industry from last year, a lot of the other players were brought down, and we're one of a handful of players still involved in that market," Detwiler said. "We really stepped up our activity because the marketplace was willing to conform to our guidelines. And we've been getting a very positive response and very well-participated underwritings, because of the consistency of our product and the expected performance."
More than anything else, GMAC-RFC is known for the diversity of its product lines, and it has been a proven leader in the securitization of jumbo and subprime loans, in addition to high LTV transactions.
Detwiler said the company is in the midst of issuing a $1.5 billion subprime securitization, launching later this month. As one of the largest issuers of subprime mortgages this year, GMAC-RFC has completed two similar deals in 1999 totaling $2.3 billion - to bring the 1999 volume to $3.8 billion in subprime securitizations, including the latest one.
"As we continue to work with our business partners, we bring them innovative structures which really provide them with greater economics," Detwiler explained. "We've done a significant amount of work in identifying what loan and borrower attributes correlate to performance. We have a stringent policy, in terms of what we want to buy, and what we don't want to buy. We are disciplined."
A Changing Jumbo Market
Even more than discipline, GMAC is paying careful attention to investors who are slowly gravitating back to higher-risk sectors of the market after shying away from them following last year's international financial debacle.
With an eye keenly focused on those specific risks, the company has made significant inroads into other mortgage-related sectors this year, and predicts that 40% of 1999's product will be jumbo paper, while perhaps slightly less than 10% will be high LTV, 18 % to 20% Alternative-A, and the rest "will roll over into asset-backed securities."
Since one of the largest chunks comprising the company's portfolio is jumbo collateral, Detwiler is particularly concerned about the shrinking size of the jumbo market as compared with recent years.
"We probably would see the [jumbo] market as being about 60% total of what it was," he noted. "Every time you go through a significant refinancing boom you see a significant drop in terms of the size of the marketplace immediately after an increase in rates. Then there is a transition period, where pricing is out of whack, and there are all kinds of pricing speed issues. Then, that will come around, and you have a situation where people are reaching for every loan. The easiest way to make more loans is to start expanding your underwriting criteria."
However, GMAC-RFC sticks to its guns - it refuses to compromise its standard simply on behalf of a lack of volume in the market. The company has deployed a rigorous selection process at the front end for jumbo loans, making it clear that not all loans are created equal.
"Since we do have the diversified product lines, we have the ability to reallocate resources to other lines," Detwiler added. "We have an intense evaluation as to which loans have better credit performance and which loans will have less prepayment sensitivity, and we are going to continue to deploy that selectivity process."
The Buy-Side Cheers
GMAC's "special servicer" approach to home-equity and high-LTV transactions is at the heart of its ability to continue to have such massive originations and excellent investor response, Detwiler says.
According to market sources, last week's securitization priced in one day - a far cry from the typical high-LTV deal, in which dealers often end up doing swaps or being left with excess bonds.
"This deal priced in a 24 hour or less marketing period," said one MBS portfolio manager. "That's almost back to where it was in early 1998, when the market was rosy."
"I think primary servicing is more important today than ever," Detwiler explains. "We are one of the seven special servicers designated by the rating agencies. We have invested significant time and dollars into reaching that level of ability because we think the servicing of so many of these assets is so crucial to the performance of the bonds."
Though a fourth-quarter high-LTV securitization is certainly in the works, GMAC may either defer the deal until next year, or try to accelerate it and issue in either October or November.
"If anything were to get crazy in the fourth quarter, we may do a smaller one earlier, to stay away from the exact year-end," Detwiler said. "If we get one in November, it will be a smaller deal, at about $350 million. We are just playing it by ear for now."