Though the scars are still showing from the liquidity crisis that befell subprime mortgage-backed securities issuers toward the end of last year, subprime securitizations still made a strong showing in 1999 despite the fact that volume is off for the sector and credit quality has not markedly improved.

According to several reports issued by the structured finance group at Moody's Investors Service, even though there was much talk about improving credit qualities for home equity product following the rose of the liquidity crisis, pool characteristics have not taken a dramatic swing for the better.

"Volumes are off in comparison to the comparable period last year," said Linda Stesney, managing director in Moody's structured finance group. "But in a way that is not surprising. The market for home equity loans last year, up until the liquidity crisis, was gangbusters. It was a record year. But at some point, it has to top off a little bit.

"Sometimes people in this market get spoiled, thinking every year is going to be a new record."

This factor, coupled with the fact that a lot of frequent securitizers are no longer in the market, has had an effect on volumes overall, Stesney said. Though last year's problems were not related to loan performance, some subprime lenders that securitized loans were forced into bankruptcy, and investors increased their scrutiny of the credit quality of loan pools that are securitized.

Therefore, even though the field of candidates doing subprime deals has shrunk, the collateral and credit quality has not improved as dramatically as was expected.

If investors were talking about the credit quality or lack thereof in the home equity product, that might have had the effect of improving the credit quality of pools; issuers might try to improve the quality of their pool in order for them to be able to place their bonds, but Moody's has not seen much in the way of improvement.

"Maybe on the margins we are seeing C' and D' product in pools, but that is not a significant driver," added Stesney. "We are not seeing a great enough improvement to lower our credit enhancement levels across the board to be consistent with a better credit quality."

Despite this factor, however, issuers were not stopped from doing subprime MBS deals in 1999, and financially stressed servicers showed only limited deterioration in servicing performance over the past year.

"The effect of the past year's unprecedented financial turmoil on the subprime finance industry is thus far not reflected in the servicing performance of this industry's financially distressed servicers," said a recent Moody's report.

"There is still great interest in this type of financing, from what we could tell," Stesney added. "There is still a strong borrower base. But of course, we only see half the market, since not all of the loans originated go to the securitization market."

While Moody's did not have any concrete evidence regarding indications for subprime securitization for next year, at least anecdotally, Stesney seems to think that the market is still robust in terms of originations.

"It is possible that dealers are booking loans and holding them on their books, but it is hard to say," she added.

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