Last week Banc of America Securities brought the follow-up $23.7 million net interest margin (NIM) to the $311 million ABFN 2002-1SB it brought the week prior, the collateral being Superior Bank-originated mortgages.
Superior was shut down by the Federal Deposit Insurance Corp. last year when it learned the bank was undercapitalized, mostly attributable to overvaluation of the residuals.
While these two transactions (and the few other deals containing Superior collateral, including a Merrill Lynch deal in late January and a Morgan Stanley deal in mid April) represent unique circumstances, in general, dealers have kicked up their subprime whole loan purchase/securitization programs over the past year, exploiting a cheap whole loan market, low interest rates, and a relatively strong bid for home equity ABS in the market, sources said.
"Some of the smaller specialty finance companies that cannot access the capital markets directly, or some of the larger ones that maybe have a story past, so the name wouldn't sell - it's those types of entities whose collateral has been increasingly showing up in dealer shelf deals," said Scott Seewald, a director in the real estate group at Fitch Ratings.
These deals are generally followed up or issued in tandem with a NIM as part of the overall execution, limiting banks' exposure to the residuals. Salomon Smith Barney brought a standalone NIM transaction last year, sources said.
Several of Lehman Brother's ARC deals in 2001 had NIMs associated with them. The bank brought more than $3.3 billion in home equity deals through its ARC and SASCO programs, according to Thomson Financial's database. Credit Suisse First Boston brought close to $6 billion in home equity deals through its issuance vehicles, and has brought nearly $3 billion so far this year. Morgan Stanley topped $2.6 billion in 2001, and has brought approximately $2 billion this year.
Other banks, including Merrill, Deutsche Bank, Bear Stearns, and Greenwich Capital have also been bumping up their activity in this segment.
In these transactions, the dealers are monetizing and capturing spread at both ends of the deals, an opportunity afforded by the low interest rate environment, which has also kept supply consistent.
The deals are able to capture excess spread through the use of NAS IOs at the top, combined with the NIM securitizations.
"The NIM market overall is definitely deepening, and there are more issuers of NIMs, and there seems to be more investors willing to buy NIM bonds, and the NIM bond structures have been evolving somewhat," Seewald said.