Last year, securitization players found themselves stumbling towards recovery, as new regulations and a weak economy posed one hurdle after another for deal makers.
I'd say we can expect more of the same in 2012. Take, for instance, the private-label RMBS market, the restart of which is essential to lifting issuance volumes. Despite government and industry efforts to pump up the non-agency market, it has failed to take off.
Even the Oct. 1 reduction of the maximum Fannie Mae and Freddie Mac conforming loan limits to $625,500 from $729,750 did not lead to borrowers automatically transferring over to the Jumbo private-label market. Economic factors such as underemployment are still preventing them from taking out Jumbo loans at today's rock-bottom refinancing rates, as Nora Colomer reports in her RMBS outlook piece.
Obviously the government hasn't found the right balance between providing liquidity to the housing market and encouraging private-sector involvement in housing finance.
There's also that other troublemaker - the economy. Among those particularly sensitive to tough economic conditions are commercial real estate borrowers. A deteriorating environment could make it impossible for borrowers to refinance maturing loans, or it could lead to lower rents when new tenants come in. Poonkulali Thangavelu explores these issues in her article this month. One thing she found was that the refinancing challenge is more pronounced for restructured loans due in 2012 and 2013. With the value of the underlying assets already eroded, these loans won't be able to compete with unlevered properties in a competitive leasing market.
But there are ways around the hurdles. Redwood Trust is a prime example. This REIT has overcome challenges in the Jumbo securitization space and managed to be the only issuer to place three non-agency RMBS backed by new loans since the financial crisis hit. This success can be credited to how the company is structured, according to the firm's officials, who spoke to Nora for her article on the REIT sector. Basically, the key difference between Redwood and other REITs is that the Jumbo issuer gets paid based on its financial results and not on how much equity it has under management. To buy loans the firm has been targeting regional banks and large independent originators.
Meanwhile, in Europe, sovereign troubles have left industry pros asking how much higher a rating agency should grade a structured finance transaction over its respective sovereign. This is an issue that has historically been the purview of emerging markets and not the eurozone, where governments with active securitization markets used to be single-A or higher.
Not anymore. With some sovereigns in junk territory, there are hordes of deals rated higher - some by nine notches - over the country where their assets are domiciled. Felipe Ossa explores the reasoning behind this wide differential in his article, and finds that while some players are scratching their heads, other think it's perfectly justified.
Finally, Felipe forecasts structured finance activity for Latin America in 2012. What will work for issuance there would be a moderate level of volatility - enough to convince investors that secured products are the way to go but not so much that they shy away from everything but the safest bets. Without a doubt, the year ahead is rife with challenges but many market participants showed in 2011 that through trial and error, they can keep doing deals, finding new niches and pushing forward the evolution of our market. Best wishes to all of you for the New Year!