The robust asset-backed securities (ABS) market in 2024 should continue this year, fueled by falling–or at least stable–interest-rates, and the second Trump Administration's pursuit of deregulation, or at least less zealous regulatory enforcement. Should the president vigorously pursue campaign-trail promises, however, the securitization market could face upheavals.
Privatizing government sponsored entities' (GSEs) Fannie Mae and Freddie Mac are goals from Trump's first go-around that went unfulfilled, and that his new administration is expected to prioritize. The endeavor appears to have flown under bondholders' radar but is highly anticipated by equity investors.
The GSEs' stock prices have increased dramatically since the presidential election, while spreads on their residential mortgage-backed securities (RMBS) have remained mostly range-bound and unchanged, said Tracy Chen, portfolio manager at Brandywine Global.
MBS spreads widening over 2022 and 2023 stemmed more from the federal government and banks largely ceasing their purchases of those bonds, Chen said, whose prices are the "cheapest" in the U.S. fixed-income market.
"The equity markets are trying to price [the privatization], but fixed-income has been skeptical because it's too difficult to fathom the pricing and to recapitalize the GSEs in a short period of time to pay down Treasury's senior preferred," Chen said.
Higher financing costs for the GSEs should lead to higher rates on the mortgages they guarantee, a result seemingly contrary to a Trump campaign promise to expand homeownership. If the Trump Administration were nevertheless to head in that direction, the ramifications would extend beyond RMBS, Chen said, noting roughly half of multi-family loans are guaranteed by the GSEs.
Trump recently said he would nominate Bill Pulte, a private equity executive and grandson of the late William J. Pulte, founder and chairman of homebuilder PulteGroup, to be the next director of the Federal Housing Finance Agency (FHFA), which regulates the GSEs.
Good times ahead for CLOs
The collateralized loan obligation (CLO) segment of the securitization market had a banner 2024, although much of the issuance in the latter half was in the form of refinancings or resets, rather than new deals. Market participants foresee continued CLO strength and a pickup in new deals fueled by increased M&A and leveraged buyout activity, as rates continue to fall or stabilize and antitrust enforcement ebbs under Republican leadership.
In addition, the Basel 3 Endgame proposal's tough regulatory capital requirements were significantly reduced in a re-proposal last September, which remains outstanding.
"Everyone is pretty convinced that Basel 3 Endgame as [originally] proposed is dead," said Michael Bright, CEO of the Structured Finance Association.
Bright said he anticipates a new effort on the drawing board once there are new regulatory chiefs at the FDIC and OCC.
"This should hopefully result in lower capital charges for all securitizations, including CLOs," he said, "But it's hard to predict much beyond that without knowing" the agencies' new leaders.
Edwin Wilches, co-head of securitized products at PGIM Fixed-Income, said the re-proposal's lower risk-based capital requirements are more in line with market expectations. One element he doesn't expect to change much is the expansion of higher requirements to large regional banks, with the collapse of Silicon Valley Bank (SVB) and other superregionals in hindsight.
"While Basel 3 gets watered down, I expect a key portion of the proposal capturing a wider range of banks won't be meaningfully different," he said.
The risk of less federal regulation
A more relaxed federal regulatory environment could spur banks to lend more, increasing securitizations of assets like consumer loans. However, cautioned Stuart Goldstein, co-chair of Cadwalader, Wickersham & Taft's capital markets group, less federal enforcement has historically prompted state legislatures and especially state attorneys general and consumer advocacy groups to step up lawsuits.
"When the regulatory map differs from state to state, it becomes more difficult to know what the rules of the road are," he said.
He added that rules enacted over the last four years by the Securities and Exchange Commission (SEC) and the Consumer Financial Protection Board (CFPB) that affect bank lending are unlikely to be rolled back, unless trade associations and other industry representatives step up to press for changes.
Today's strong economy raises questions about whether deregulation would even be beneficial to stakeholders in the financial markets.
"If you regulate banks less, will that help the economy that much more?" Wilches said.
ABS issuance in 2024 increased by 50% over 2023, said Stuart Mitchell, head of UMB Bank's ABS corporate trust product. He added that whatever changes the Trump Administration institutes, the combination of falling rates and inflation should continue to support the energetic ABS activity his firm has seen, acting as trustee on 39 public deals in sectors including autos and student loans, and six private oil and gas deals.
"We don't expect many changes, and based off the current economic trajectory and consumer spending and borrowing, the ABS market should have a strong 2025," he said.
Depending on which goals the president-elect prioritizes, however, the ABS market could see upheaval. Chen predicted that student loan ABS will see one of the biggest impacts, since the loan forgiveness programs under the Biden Administration are likely to end, and repayment on the loans will resume.
"Prepayment speeds would slow down for government loans, and private student-loan ABS should benefit because they'll no longer be consolidated in student loans to be forgiven," Chen said.
Trump's tariff threats coming to fruition could adversely impact solar and container ABS deals, she said. Subprime auto could see a boost, at first, from tariffs increasing prices on used cars. Issuers liquidating defaulted loans would also benefit, but eventually higher car prices and tariffs should reduce demand and deflate prices. Tariffs are likely to adversely impact other areas of subprime ABS, such as marketplace loans and subprime credit cards, she added, and a 10% cap on credit-card interest rates proposed by Trump could further dampen the credit card ABS market.
Solar and other ABS deals related to renewable energy, which run contrary to Trump's "drill baby drill" mantra, could also be adversely impacted if Trump Administration 2.0 reduces the Inflation Reduction Act's funding.
But maybe not. Wilches said that rules around the tax credits it provides may get stricter, but some elements are bipartisan, such as tax credits promoting the domestic production of solar panels, inverters and brackets, especially in Republican-dominated states such as Texas and Florida.
"Do you really want to undo all that?" he said.
