LAGUNA NIGUEL, CALIF. - While most seem to think the residential -heavy CDO market will naturally shift toward deals with more diverse pools of assets as investors voice concern over the U.S. housing market, some are noting to the contrary.
During a panel discussion at Opal Financial Group's CDO Summit held here last week, John Joshi of Countrywide Alternative Investments Inc. said that while setting up his unit during the last eight months, he has heard from investors that they'd like to see higher residential mortgage concentrations within CDO pools. "The CDO market is acting like the older re-REMIC market," Joshi said, adding that investors have been asking him for CDOs with single issuer concentrations of anywhere from 50% to 100%. That scenario is, of course, better for equity investors than for triple-A investors, who would prefer a more diverse pool, he added.
Perhaps the requests for higher RMBS concentrations are a result of investor familiarity with older, well-performing securities, which were predominantly triple-A rated collateral, said Tony Barkan, a principal at Stockbridge Investment Management. "Historically, resi ABS was all triple-A ... and performance was good. I think if we get stress in resi, people will ask why we didn't diversify," Barkan said. "I think that the deals with diversified ABS will come back."
Many investors shied away from diverse pools of ABS collateral within CDOs after later vintage deals sprinkled with exposure to the manufactured housing and airline industries suffered dramatic downturns in performance following concentrated defaults in those sectors. "There was a whole lot of stuff back then that had no collateral value, it was basically lending on an unsecured basis," said Tom Keene, director of capital markets at Hartford Investment Management. Analysts point out that the benefit of a diverse pool of assets is greatly diminished when the collateral manager is reaching for new collateral types in order to spice up a homogenous pool without fully understanding them.
Buck Burnaman, a managing director at Newstar Financial, said it was the structure, not necessarily seeking diversity for diversity's sake, that led to the collateral pool formation of earlier vintages. "Earlier deals were arbitrage deals - as a result, in the market you had to buy all the sectors," Burnaman said.
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