Spurred by persistently low short-term interest rates, as well as greater-than-expected prepayment fee collections, net-interest margin securitizations totaled $1.26 billion, the second-highest total to date, according to a new report issued by Standard & Poor's. While total volume was down from 4Q02's record of more than $1.4 billion, deal size is growing, averaging $70 million per transaction during 1Q03 quarter, up 55% from $45 billion in 4Q02.
The report, titled NIMs Quarterly Highlights, addresses issuance volume and performance of deals throughout the first quarter as well as the low rates that have stimulated mortgage lending and NIM issuance. S&P has scheduled a conference call to discuss its findings for Tuesday, May 20 (see upcoming events p.3).
The number of issuers using NIM technology seems to have leveled off in the first quarter, with 13 different lenders selling a NIM, all of which had sold NIMs previously. During the fourth quarter of last year, by contrast, three issuers priced NIMs for the first time. The names that make up the bulk of supply are no surprise to anyone who follows the sector, as leading subprime lenders Option One Mortgage, Long Beach Mortgage, AmeriQuest Financial, brought the bulk of the supply while principal finance efforts at Lehman Brothers (via its ARC and SASCO issuance vehicles), and Credit Suisse First Boston (via HEAT and HEMT vehicles) round out the top five NIM issuers.
The concentration among this leading group has increased since 3Q00, when the resurgence of the modern NIM market began. Back then, the five aforementioned issuers accounted for roughly half of the entire market by volume. Currently the group accounts for 62%, notes S&P.
NIM performance continually beat expectations, particularly in older vintages, as interest-rate assumptions are modeled into the structure were much higher than actual rates. Of the 131 separate NIMs outstanding as of March, 125 have not experienced any disruption of principal or interest. The remainder have yet to begin paying coupons. NIMs have paid off much faster than anticipated, repaying in full after 16 months, despite being modeled to pay in 20. Aggregate principal balances for NIMs that have paid down have done so 10.2% faster than cash flow projections at the time, on average.
How quickly deals are paying down depends on vintage, S&P notes. NIMs issued from 3Q00 through 4Q01 - the start of the current spike in mortgage refinance activity - excess interest on underlying ABS was 40% to 50% greater than anticipated. NIMs from this vintage benefited the most from the low interest rates, whereas NIMS issued in 2002 and later have yet to benefit as much. S&P does expect, however, that given losses and prepayments staying within projections and stable (or lower) short-term interest rates going forward, NIMS should continue to pay down faster than expected.