Although coming off a shaky one or two-year stretch, spreads on securitizations backed by high loan-to-value second liens have tightened up quite a bit, with the triple-A wrapped tranches pricing in line with their home-equity brethren, analysts said.
The bigger story, however, might be the secondary market, where levels have come in as much as 1000 basis points over the last year.
For example, double-B secondary paper is trading in the 800 over Treasurys range, compared to as high as 1700 basis points over Treasurys a year ago, according to John Devaney, president of United Capital Markets, a broker dealer specializing in subordinated ABS.
In fact, two separate $10 million blocks of double-B-rated FirstPlus 1997 paper traded in the 700 range just last week.
In addition to the CDO bid, which has benefited subordinate ABS across the board, there's a perception that the high-LTV market has recovered and investors are more comfortable with the product than they were a year ago.
The improvement in the market is a combination of several other factors.
"One has been the very fast, voluntary prepays, which have helped to delever the deals," United's Devaney said. "Also following FirstPlus's bankruptcy, default rates have been steady between 5% and 6%, which has allowed the overcollateralization targets to be met on the 97 deals, opening the principal windows."
In the 1997 deals, 6% does not exceed available excess spread.
On the new issue side, most deals this year have come to market wrapped, primarily off the GMAC-Residential Funding Corp.'s RFMSII shelf (HI series). RFC's last high-LTV deal priced in late June. The 0.9-year AI1 class priced at Libor plus 12 basis points, two points outside the comparable class on RFC's most recent home-equity deal (RFMSII 2001-HS2).
According to Tom Zimmerman, a researcher at UBS Warburg, high-LTV seniors were pricing five or 10 basis points behind home-equity a year ago.
Although Countrywide Credit Industries has been in the market twice with high-LTV collateral, both offerings were backed, at least in part, by Bay View Capital Corp. high-LTV loans.
For example, a few weeks back, Countrywide priced a $137 million sen/sub deal that was led by the issuer's in-house dealer, Countrywide Securities. That deal was backed 65% by Bay View high-LTV and 35% by Countrywide-originated fixed-rate second liens.
Last fall Countrywide purchased the FirstPlus servicing platform, which is generally viewed as a positive moment for the sector.
Meanwhile, via its GRCT shelf, Goldman Sachs brought a $755 million high-LTV deal backed by First Plus collateral, sources said.
Uptick in Speeds
"On the positive side, it's a much improved credit story than it was a year ago," said Warburg's Zimmerman. "But then the speed story has people a little worried right now."
In the last few weeks, both Credit Suisse First Boston and UBS Warburg have released commentary on the uptick in high-LTV prepayments. Constant prepayment rates (CPR) have nearly doubled in some pools.
According to CSFB, the average three-month CPR for the 1998 vintage increased to 29% in May from 22% in February.
One factor: housing appreciation has reduced loan-to-value ratios, which puts borrowers in line for a combo loan, or a consolidation of the first lien mortgage and the second lien (high-LTV) into a conforming first lien. According to Warburg's Zimmerman, this often happens when the combined loan to value hits the 90%-95% range. While housing appreciation spiked in 2000, the lower-interest rate incentive did not kick in until this year.
CSFB points out that loans with prepayment penalties built into them prepay faster than those without, attributable to the expiration of the penalties. While prepayments tend to be lower during the penalty period, they are faster once the period expires.
"Real estate prices are still holding up, and borrowers may be concerned about how long that will continue," added Rod Dubitsky, a vice president at CSFB and author of the recent report. "Looking where we are in the real estate cycle and where we are in the interest rate cycle, borrowers might view this as an opportune time to refinance."
The bank also notes the increased availability of first-lien high-LTV loans, although some of those programs, like the one offered by RFC, are primarily purchase loan programs, rather than refinance loans.
Credit performance has remained stable, with average charge-off rates declining slightly (5.4% from 5.6% for 1998 vintage, 5.35% from 5.9% for 1997 vintage), according to CSFB.