ABS market players have certainly learned their lesson from the problems that led to the financial crisis.
This month's stories demonstrate that loan quality has improved and transactions have gotten cleaner, simpler and safer. But better behavior hasn't necessarily made us more optimistic. Going into 2011, there are still daunting obstacles in the way of a healthier, more self-sustaining primary market.
In an observation exclusive for ASR, Fitch Ratings structured finance head Kevin Duignan looks forward to 2011, and sees even better loan quality from higher quality issuers. This is certainly grounds for optimism.
Yet two concerns just won't go away: regulatory issues and the precarious economy.
For instance, my story this month details how investors are showing renewed interest in commercial real estate and, by extension, CMBS. QE2 and improving fundamentals might spur it even further. But industry expert Lisa Pendergast said opportunities in CRE are ultimately tied to job growth, which is still in doubt.
John Hintze, in his article, examines the different regulatory obstacles facing ABS participants. The SEC is has listened to the industry and has temporarily nullified the repeal of Rule 436g. So basically rating agencies are still not liable for their public ABS ratings, at least for now.
There is still a slew of regulations waiting for approval in 2011 that could potentially reshape the securitization market. High on this list is the imminent risk retention proposal prompted by the Dodd-Frank Act, among other measures.
Of course there's the question of what's going to happen to Fannie and Freddie. Bill Berliner in his column says that there is a reasonable chance that the incoming Congress will tackle the "contentious issue of GSE reform." But he warns that radically changing the GSEs - with the prospect of even eliminating them completely - can seriously disrupt the mortgage and housing markets.
And let's not forget about the non-agency RMBS market. Nora Colomer says it's unlikely that 2011 will see origination volumes coming back in that space. It's not about the lack of product either. Panelists at a recent ASF event said that banks still have the capability of originating these loans and borrowers can still obtain mortgages from a number of financial institutions. However, the question is whether securitization is a cost-effective funding tool for non-agency issuers.
The European securitization market is exhibiting the same push and pull, according to Nora's other story. In 2010, the market saw the return of ABS new issuance as roughly €75 billion ($98.2 billion) has been distributed to end investors year-to-date. But the uptick in primary volumes is miniscule compared with the amount of securitizations still retained by issuers.
It's not the end of the line for structured finance, however. There are bright spots. Covered bonds, for instance, have been talked about as a viable alternative to RMBS securitizations. This month's issue features a roundtable sponsored by Bingham McCutchen and Moody's Investors Service where the FDIC's Michael Krimminger and other covered bond experts debate the merits of the sector.
And of course there's always something percolating in Latin America. In Brazil, interest is swirling around transport infrastructure, with the country hosting both the 2014 World Cup and 2016 Summer Olympics.
So far, Felipe Ossa says that securitization has not registered as a viable source of funding for Brazilian transport. Devotees of receivable investment funds (FIDCs), the local ABS vehicle of choice, are expecting more of an impact ahead. But, it's still a wait-and-see especially with some regulatory issues acting as roadblocks. It's not that pros in Brazil necessarily want fewer rules. They just want better ones.
On that note, Happy Holidays and enjoy the New Year!
Until 2011, Karen Sibayan
