Lehman Brothers flexed its muscle in 2007 and once again took the crown as the top U.S. RMBS manager, according to Thomson Financial RMBS manager rankings for 2007. This widened the gap between the top placer and Bear Stearns, which repeated its second-place showing from 2006.
Lehman ended the year selling roughly $95.8 billion in agency and non-agency RMBS and garnered a 10.4% market share with 111 issues, Thomson reported. By comparison, Bear Stearns sold about $83 billion in agency and non-agency RMBS and held a 9% market share with 100 issues.
Although Lehman won this year's league tables by a wider margin than last year, perhaps not surprisingly, the top two finishers saw their numbers dip from 2006. Last year, Lehman had 148 deals totaling close to $108 billion and a 10.3% market share. Bear Stearns, meanwhile, sold approximately $106.1 billion with 138 deals for a 10.1% market share.
The final overall industry tally from Thomson reflected the tumultuous year the mortgage industry had in 2007. The total number of deals dropped to 1,155 from 1,446 in 2006, with proceeds topping out at $922.1 billion. The industry sold more than $1 trillion in agency and non-agency RMBS last year.
Despite the turbulent market conditions, there were not many drastic changes in the rankings over the past year. Morgan Stanley moved up six notches to the third spot, bringing in $73.7 billion on 83 deals for an 8% market share. Meanwhile, Deutsche Bank fell from the fifth spot down to 9th, with 64 issues totaling about $43.8 billion for a 4.8% market share. Last year, Deutsche pulled off 116 deals worth $74.9 billion for a 7.1% market share.
If 2007 proved to be a year of unprecedented lows for the industry, the beginning of 2008 could be defined by a large amount of uncertainty, according to analysts. The strongest bet could be that, at least initially, there won't be a significant change in direction for the market.
"What we'll see in securitization is just a carry-over from the fourth quarter in 2007," one analyst said, who asked not to be named, "But it's difficult to make any predictions right now."
The projections that are trickling in thus far contain some grim prospects. According to a Jan. 2 report from UBS, foreclosures will rise sharply by the end of the year, while the real side of the economy will be dragged down by the housing market slump. "And that slide is way too far under way to be prevented by Federal Reserve or Congressional action," UBS analysts wrote.
But the UBS research team also offered a glimmer of hope, forecasting prices on RMBS to hit their lows long before mortgage foreclosures peak, or housing values bottom out. This will create opportunities for savvy investors, according to UBS analysts. They recommended trading on triple-A non-agency products, which are cheaper than their agency counterparts; hybrid ARMs, which are cheaper than fixed-rate products and maintaining a up-in-coupon bias and buying IOs as speeds slow.
Before looking too far into the future, however, market participants are still licking their wounds and assessing the trends of the past year. While the overall performance of the industry did not, in hindsight, generate many surprises, Ajay Rajadhyaksha, head of U.S. fixed income strategy for Barclays Capital, said he was intrigued by how quickly borrowers that would normally go to the mortgage credit markets moved to the conforming mortgage markets.
Loans, for example with FICO scores below 700 and LTVs of about 80% are typically considered credit-impaired borrowers. These loans used to make up only about 3% to 4% of all agency mortgages issued in 2005 and 2006 and as late as early 2007, but in the last six months they have moved to become as much 12% of all agency mortgages issued. This happened before any of the initiatives to help troubled borrowers were implemented.
"They're not getting the kind of executions they want or the lax underwriting they have gotten in the past so they might be going into these markets kicking and screaming, but they're going there because there are no other avenues for them," Rajadhyaksha said.
The analyst, who asked not to be named, noted that the issuance of subprime loans did not actually shut down, even after the market began to spiral out of control. One major bank increased its subprime loan issuance by 20% to 30% at one point last year, he said. "There are so few originations being done right now that you can actually do pretty well, as long as you have a balance sheet to put them on," he said.
Rajadhyaksha pointed to the fact that some loans are technically subprime because they are being issued by subprime lenders, but the characteristics of these loans are much cleaner now than they were six or nine months ago. The conditions under which they are getting those loans are much stricter than they were in 2006, he said.
"Subprime lenders are inclined to still make loans to the extent that they can," Rajadhyaksha said. "You can't stop making loans in the middle because there is a lot of leverage built into the business model, so even if you stop making loans there is still a lot of costs you have to pay out. It is very difficult to stop on a dime."
This year investors figure to scale back their expectations about the role the GSEs will play in the recovery of the mortgage industry. Freddie Mac's $2 billion third quarter net loss is central to the increasingly modest forecast.
"There was big hope for them, but in fact they are not going to help as fast as people thought they would," the analyst said.
Barclays' Rajadhyaksha expects the agencies to be of almost no use for at least the first six months of this year. "I don't think the GSEs are by any means the silver bullet that helps the secondary mortgage markets," he said. "To the extent that they can help depends on whether their capital constraints are relaxed by the middle of next year."
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