Some panelists were optimistic while others were a little bit more guarded on the future of securitization at this week’s Information Management Network ABS East conference.
Speakers at yesterday’s opening general session were focused on the non-agency RMBS sector, the revival of which many market participants view as the crucial indicator of the securitization market’s true comeback. The panel was called Restoring Confidence and Rebuilding the Industry : The Role of Securitization.
The difference between the private label residential mortgage-backed market and other ABS sectors is it’s exposure to “individual mom-and-pop” companies, according to Christopher Flanagan, managing director at Bank of America Merrill Lynch. Additionally, unlike the agency mortgage market, the revival of non-agency RMBS is hindered by various litigation, fraud and default risks.
He added that the private label market is crowded out by the Federal Reserve owning agency MBS and unwinding its portfolio. There is also the aspect of the constant policy shifts. the “latest wrinkle” being extended foreclosure periods.
Brian Lancaster, head of MBS, CMBS and ABS strategies at RBS, that government intervention has pushed out the forclosure process, which is key in terms of the direction to which home prices are headed.
CMBS recovery, he said, is relatively easier because there is not as much government intervention in the sector. There is also the flexibility of not having too many loans backing CMBS pools, unlike RMBS transactions, Lancaster added.
Frank Byrne, global head of securitization at UBS, said that there is a fair amount of prime Jumbo loans in banks’portfolios, which these financial institutions would rather carry on their balance sheets given their low deposit bases. In this way, these banks are able to avoid capital structure issues and the uncertainty around which criteria to use for the pools.
Bright Spots
Byrne also offered a glimmer of hope by saying that there is an awful lot of market participants, including investors, issuers, and rating agencies, who have been reviewing their portfolios and their business approaches. He added that weaker structures and asset classes remain in the “penalty box.”
Although it has taken the new-issue market awhile to come back, many companies are currently focused on rebuilding, which represent “massive opportunities out there,” Byrne said, adding that these firms will be the future securitization issuers.
He views this year to be a transition where many of the portfolios have been “cleaned up.” And with the portfolios running off, the timing is right to get new allocations. He also sees potential RMBS and cross border activity. “Net, net, apart from the regulatory issues, we are on the right track,” he said.
Meanwhile, Anatoly Burman, senior managing director at Aladdin Capital Management, said that there will be some clarity around regulations in the near term. Banks, in the meantime, are starting to originate RMBS and in six months he expects the market can be pretty healthy, probably to where ABS is currently.
However, this progress can be derailed by those in Washington. Flanagan said that there is a schism that exists regarding the way the government views securitization. The Fed, he said, clearly sees it as an important tool to help the U.S. economy. Those in the legislature, on the other hand, are still assigning blame to securitizaton, rating agencies, and banks. This “type of rhetoric is still out there,” he said.
Spread Tightening
Panelists also discussed how spreads have come in quite a bit. Lancaster said that this is a reflection of investors reaching out for yield, citing Asian dollar-based investors he met with recently that are once again starting to look at the securitization market.
“People are just tired of being scared,” Burman said. He added that the current spread compression is a reflection of three factors: the return of market confidence; having way too much money chasing too little product (particularly with insurance companies’ portfolios running off); and the anemic ABS issuance that continues to put pressure on spreads.
Data Availability
Another issue that speakers touched on was the type of data needed by investors on ABS transactions.
“At the end of the day, more information is better than less,” Burman said. Rating agencies, he said, still have access to transaction information that investors are not privy to. He added that having current information on securitization offerings is important because the data is constantly changing. For instance, a foreclosed borrower can now be subsequently “de-forclosed.”
Flanagan said that the problem is that information costs money for the investors because they have to learn the analytics while issuers have to provide the systems on which data could be delivered to buysiders. The consumer eventually ends up shouldering these expenses.
He questioned the usefulness of having the vast amount of RMBS data, where other sectors of the ABS market, such as autos, don’t have as much but the “end result is that autos are fine.”
Lancaster added that what matters is the quality and the timeliness of the information, particularly in the secondary market.
