BOCA RATON, FLA. -The opening panel discussion moderated by Moody's Investors Service Team Managing Director Gus Harris was an oftentimes rambling, though thoroughly substantive, Star Wars-themed discussion on the current state of the ABS market at Information Management Network's ABS East Conference last week. Although neither the Jedi Master (Harris), nor the Jedi Counsel of panelists could fix the audio problems or alter the time/space continuum in order to finish in the allotted time frame, a lively discussion was had, focusing primarily on one topic: what could potentially end the unprecedented prosperity that has valuations at all-time highs, despite supply being up 35% year-to-date.
With the increased supply being driven by the mortgage sector, the discussion quickly focused on the potential for a housing market collapse. And many experts remain divided on whether we have experienced a paradigm shift in mortgage lending, or whether the ABS market is being set up for disaster.
"I learned from my parents to pay down my mortgage," explained Western Asset Management Portfolio Manager Ron Mass. "I guess they were wrong." Mass added that the perception of some is that having a fully paid mortgage is akin to having your money stuffed under the mattress. And the wave of affordability products only enhances this perception.
He noted that despite the home prices increasing to 25 times rental costs since 2000, the two leading factors in the ability to own a home - the ability to make monthly payments and the ability to make a down payment - have been dramatically altered. Mass even joked there would soon be a zero-down five-year declining monthly payment mortgage.
Most on the panel, however, did not believe there was a strong chance that housing markets would see a rapid price decline that is coupled with dramatically rising interest rates. GMAC-RFC Senior Vice President Diane Wold contended that, while there may be some regional housing bubbles bursting, most mortgage-related securitizations were both sufficiently enhanced and geographically diverse enough to withstand a less-than doomsday scenario. Wold also noted that land shortages on both coasts were likely to support housing prices.
Portfolio manager and TIAA-CREF Managing Director Sanjeev Handa noted that both investors and borrowers have grown more sophisticated and have learned how to navigate the pitfalls some fear. "Investors have become more sophisticated in analyzing these pools and are also using the increased liquidity sources - CDOs and hedge funds - to unload risk after a given time frame," Handa said. Additionally, "homeowners are increasingly sophisticated and are less concerned about credit events and bankruptcy."
All on the panel agreed that there were numerous conference attendees more than willing to lend to a consumer with a spotty credit history.
Nomura Securities Director and Head of Structured Finance Research Mark Adelson countered that while some borrowers may be as sophisticated as described, "not all homeowners are that sophisticated." Additionally, Adelson does not believe that investors have adequately quantified risk. "Even the possibility of a [housing] bubble burst should lead [investors] to a defensive position," Adelson added.
MBIA's Head of Structured Finance Mark Zucker chalked up the lack of worry to the fact that all capital markets participants, from lenders to surety providers to dealers and ultimately investors, rely on quantitative modeling analysis on which to base their decisions. "Do we truly understand the mathematics and assumptions used in these models? I question that," he said then asked, "Are we all heading in the same direction using the same models?"
Nomura's Adelson suggested that the models currently being used were untested, considering the potentially negative circumstances the market faces. "Using a model without adequate stress testing is like climbing into a rocket without a test launch," he said.
Using the example of the U.S. captive auto lender downgrades this spring, Adelson explained that model-reliant hedge funds were "whipped" by playing the equity against the credit default swaps. "The market reaction was the opposite of what the models said it would be," he added.
United Capital Markets President John Devaney added that the participants in the CDO market cared little about housing market performance, ABS market performance or even their own deal performance, as long as they collected the "50 basis point strip" in the form of collateral manager fees. He cited anecdotal examples of dealers offering inexperienced managers free collateral warehousing facilities in exchange for underwriting mandates and the fees that go with them.
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