Bad news from the housing and subprime MBS industries suppressed securitization productivity last week - and not just for mortgage-related fixed-income products.
After Countrywide Financial told investors that continued weakness in the housing market caused its second-quarter profits to shrink by nearly a third, the National Association of Realtors reported that existing home sales slumped in June. Hitting closer to home, Moody's Economy.com reported that mortgage credit quality would weaken substantially through the rest of 2007 and well into next year. By summer 2008, the service predicted, delinquencies would peak at 3.6% of all mortgage debt outstanding. Once again, the subprime ARM MBS market is expected to suffer the most severe losses, with the in-foreclosure rate expected to hit 10% by mid-2008.
Indeed, the subprime mortgage and U.S. CDO markets' woes have caught the interest of the investment community overseas - even among investors who never bought a mortgage-backed security, according to one market observer. The popular press has repeatedly raised concerns that the current problems in the subprime mortgage market will trigger an economic recession here, and eventually set off global economic malaise.
Whether those anxieties are justified remains to be seen, but malaise has already taken hold of the U.S. ABS market. Just a handful of announced deals actually priced last week.
"The whole market in general is off keel," one trader said. "It really is just malaise, because investors have gotten whacked by the subprime market. They are sitting on their hands, basically."
In some cases, tried and true credit card and auto structures took longer to gain traction in the marketplace last week than they would during a less tense
period. The $1 billion Nissan Auto Lease Trust, which is managed by UBS, according to market professionals, is one example of a deal that is generally going well but is taking longer to be wrapped up because investors are being cautious about where to put their money. Another auto transaction waiting to take off was the JPMorgan Securities-led $325 million Prestige Auto Receivables Trust. If this transaction prices according to current expectations, issuers will reap a minus one basis points over its 0.25-year triple-A tranche. At the same time, though, its triple-A-rated, 2.69-year tranche was being talked at 28 to 30 basis points over swaps.
A small handful of transactions did price last week, however. The $750 million GE Dealer Floorplan Master Note Trust, led by Banc of America Securities and Merrill Lynch, saw its three-year triple-A notes price at one basis point over one-month Libor. A credit card transaction, the $750 million Household Credit Card Master Note Trust, led by HSBC, was expected to price last week. Its triple-A-rated tranche, at press time, was being talked at four basis points over one-month Libor.
The $3.2 billion LB Commercial Mortgage Trust 2007-C3 was one example of the CMBS deals that grabbed more of the limelight amid the general slowdown in ABS pricing activity. Led by Lehman Brothers, its shortest-duration triple-A bonds priced at 14 basis points over the benchmark, and some of its 10-year, triple-B bonds priced at 275 basis points over.
Investor malaise is certainly expressing itself in RMBS issuance. One recent transaction, the $853 million Citicorp Residential Mortgage Securities, led by Citigroup Global Markets, saw its five-year tranche come in at 27 basis points over one-month Libor. Indeed, some issuers and deal managers are waiting before they launch RMBS deals secured by 30-year, fixed-rate, self-seasoned mortgages.
"If you have good collateral, you don't want to just take what the market gives you," one manager said. "You want to be able to dictate [pricing] a little."
Then again, while some investors might be willing to look at deals in the pipeline, few are willing to pony up at this point.
"You have some people waiting on the sidelines until more clarity comes back," one market professional said.
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