PARADISE ISLAND, Bahamas - In addition to the recent passage of the Alternative Mortgage Transaction Parity Act (see ASR 9/30 p. 10), the net-interest margin (NIM) sector faces the challenge of a potential rising interest rate environment, when the economy does in fact rebound, noted market sources at the Information Management Network ABS East conference last week. Thus far this year, the asset class has fared extremely well, benefiting from declining rates that have led to faster-than-expected paydowns, giving investors the higher yields inherent within the sector much sooner than anticipated.
A trend born out of these quick paydowns is the re-NIMing of residuals, which is expected to pick up in the new year, as 2000 vintage deals reach maturity. Instead of the initial 27-month principal repay NIMs have been structured for, they have been paying down in approximately 15 months.
But the future of the NIM sector will likely require some structural changes, noted Standard & Poor's Managing Director Tom Warrack, a panelist on the NIM/residual-interest session. In future NIM transactions, S&P would like to see interest rate caps, step-up provisions and the allowance of NIM bondholders the right to vote on the standard 10% clean-up call in home-equity ABS.
Interest rate caps are seen as very likely for future NIM deals, due to the basis risk that would develop in an rising interest rate environment.
S&P would also like additional loan-level data, rather than the total pool data usually reported by lenders. It was noted, however, that the trend among lenders is for higher FICO scores in HEL offerings. David Wells, vice president in capital markets at Option One Mortgage Corp. added that his firm has drastically cut its lending to borrowers with sub-500 FICOs and that scores have trended upward industry wide.
But since NIMs offer issuers attractive access to liquidity on a cost-of-funds basis, the sector should adapt and issuance should remain strong, especially in conjunction with the plethora of acquired-collateral backed home equity offerings that have hit the market in recent months, according to Banc of America Securities principal Dave Nagel.
