Prepayment risk was forefront in the minds of many home-equity ABS investors in 2002, given the refinancing wave that maintained momentum throughout the year. With this as a backdrop, underwriter Banc One Capital Markets and issuer GMAC Mortgage created a revolving-trust, bullet-paying home equity structure - GMAC Mortgage 2002-HE-3 - that could ostensibly shield investors from the
prepayment risk inherent to traditional home equity transactions. In addition to attracting home equity players, the deal lured buyers from the broad base of credit card investors into the mortgage sector - a migration that became evident in yield spreads.
"The GMAC Mortgage 2002-HE-3 transaction addressed the age-old challenge in the home equity sector of protecting investors from volatile prepayment risk, particularly extension risk, which is very important to our investment portfolio strategy," said Mike Ferraro, director at TIAA CREF. "This is one of the most innovative deals to date and should be the standard in the home equity sector."
In order to offer prepayment protection, structurers at BOCM combined properties of both hybrid commercial paper conduits and term ABS structures, allowing them to achieve off-balance-sheet accounting treatment for the issuer.
Further, because credit card ABS technology was applied to mortgage collateral, the $542 million transaction was able to attract investors outside the mortgage universe, including several crossover and first-time buyers from the credit card and auto sectors. The deal was, in fact, oversubscribed - despite competing home-equity deals in the market that were being offered at significantly wider spreads.
Spreads for the MBIA-wrapped 2002-HE-3 transaction came in at 11 basis points over one-month Libor for the 1.5-year A1 class; 15 basis points over one-month Libor for the three-year A2 class; and 28 basis points over one-month Libor for the five-year A3 class. Competing wrapped HELOC offerings with average lives of less than three years were pricing in the 35 basis points area over one-month Libor at the time.
The deal, which was rated by all three rating agencies, was particularly interesting to credit card investors because it featured the first credit card-like bond classes that made use of mortgage collateral. The structure involved the utilization of targeted Final Payment Date bond classes (i.e. bullet maturities) that provide investors with monthly interest as well as 100% of their principal on a specific and predetermined maturity date.
This targeted final payment was made possible through the issuance of Variable Pay Revolving Notes (VPRN) - triple-A rated, monoline surety wrapped and (along with the class A notes) fully transferable notes that are repaid through principal collections on the underlying collateral. Although the VPRNs are fully transferable, they were not offered to investors and were initially held by a commercial paper conduit administered by Bank One, NA.
During the first 18-month revolving period of the deal's life, the VPRNs are funded via principal payments from borrowers, which simultaneously support targeted overcollateralization levels. After 18 months, the term of the A1 class matures, at which time the VPRNs advance the principal to A1 class bondholders. During months 18-36, the VPRNs once again build up principal payments, used to pay out A2 bondholders after three years. The process repeats itself through month 60.
Additionally, the deal included a multi-maturity, sequential-pay home equity securitization (without a REMIC election), allowing it to avoid Taxable Mortgage Pool (TMP) classification and to receive a debt-for-tax result.
GMAC Mortgage 2002-HE-3 priced well within expected levels, primarily because the innovative structure allowed for a more diverse investor base - including insurance companies, foreign banks and managers.
"From an issuer's perspective, the GMAC 2002-HE-3 home equity transaction was an extraordinary breakthrough in our sector," said Sandy Blitzer, vice president and head of trading at GMAC Mortgage. "It allowed us to access a new and more diversified investor base, which substantially improved our issuance spreads relative to traditional home-equity structures."
The GMAC 2002-HE-3 transaction priced roughly 15 basis points (per annum) tighter than other benchmark deals that priced during the same period. The deal also provided issuer GMAC Mortgage with a roughly 12 to 13 basis points per annum cost advantage relative to a term issuance structure. At the same time, this transaction priced about five basis points behind credit card deals with comparable maturities.
Although the GMAC 2002-HE-3 deal didn't make a big splash when it hit, it took many months to become reality. The concept was pitched to numerous home equity issuers, but all except for GMAC Mortgage chose to wait on the sidelines until someone else proved that the concept worked. Now that issuers can see the tangible benefits of the structure in the form of more attractive funding levels and a broader investor base, expect to see other top-tier home equity lenders with revolving, bullet-pay HELOC issues in the coming year.
Deal at a Glance
Category: Most innovative structure
Award winner: Banc One Capital Markets, GMAC Mortgage
Deal type: Home equity ABS
Size: $540 million
Date Announced: Aug. 19
Date Completed: Aug 21