Last week, Fitch Ratings announced that it had upgraded two home equity net interest margin securitizations, something that, prior to 2002, had never visibly happened. The agency confirmed it has raised its ratings on one other NIM deal earlier this year, though the action was not publicly announced.

Interestingly, NIMs generally aren't around long enough to be upgraded, as the structures have average lives of less than one year and payout inside of 24 months. According to Fitch, the two deals it just reviewed - both brought to market through Morgan Stanley issuance vehicles - were set to pay out eight months ahead of schedule. Fitch has not ruled out more upgrades down the line.

"The 2000/2001 vintage has performed extremely well, and basically outperformed expectations," said Carol Faber, who heads the subprime RMBS group at Fitch. "The transactions are benefiting from lower interest rates and slower than projected prepayment speeds."

The two transactions Fitch upgraded last week - MSDW Capital I NIM 2001-NC1N and MS ABS Capital I NIM 2001-WF1N - are backed by collateral originated New Century Mortgage Corp. and Wells Fargo Home Mortgages, respectively.

Structure gains popularity

Lately, it seems nearly every senior/subordinate home equity securitization has a NIM issued in tandem, though not all are visible. According to research from UBS Warburg, there was close to $2 billion in NIM issuance in 2001, and that figure is expected to rise this year. While alternatives exist for repackaging excess spread - such as issuing an interest-only strip - NIMs have become the favored method. Fitch has rated more than 130 since 1997.

The short but yieldy structure, which monetizes a portion of the residual, has become increasingly popular with investors over the last two years. Issuers prefer the NIM because it removes certain risks from the balance sheet, and improves the all-in cost of funding.

As Warburg noted in its April report, some of the early NIM transactions that closed in the mid-1990s had problems. The first NIMs were repackagings of seasoned manufactured housing collateral. In 1997, the market began to see more home equity residuals repackaged.

However, the 1998 credit problems and refi wave took down several of the deals, and HEL NIMs did not reappear in volume until 2000.

Unlike the early deals, NIMs are generally not backed by seasoned collateral but new issue. The current deals are shorter in term and are structured to mediate refi-risk, as prepayment penalties (less frequent in the early deals) are built into the structures, so the prepay cashflow pays into notes.

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