As the European sovereign crisis and uncertainty in the U.S. housing market play havoc with the prices of securitizable assets, appraising risk seems as easy for investors as threading a needle while riding a rollercoaster.
Also frustrating price discovery are the dearth of fresh ABS supply and poor data transparency. This is especially true in the sub-investment-grade arena, as Nora Colomer reports in this month's cover story.
However, investors are forging different paths to higher yielding investments. They have been pricing collateral at what they deem to be rock-bottom cash flows. Their trick is to generously discount for any downside that these assets might have. The end result: they are able to buy safe assets by calculating for wide margins of error and at the same time deploy the extra funds they need to put to use.
Dealing with discounted assets is not only a domestic theme but one with which the U.K. is all too familiar.
In Nora's other story, she reports that there have been a number of high-profile attempts by banks on the other side of the pond to get rid of large CRE portfolios at significant discounts. Among the more prominent sellers are Credit Suisse and Lloyds. Although these sales are a great way for players to limit CRE exposure and raise capital, it's tricky to persuade buyers. Even with the deep discounts, sellers have often had to sweeten the offer with vendor financing.
The U.K.'s also at the center of another story this month - the sale of U.K. paper to U.S. investors. Felipe Ossa reports that dollar tranches in RMBS and CC deals have been going up in both relative and absolute terms over the last several months, and the trend looks set to continue. Players are also looking to peddle other European asset classes across the pond.
Meanwhile, in this month's column, Bill Berliner tackles the possibility of another round of Fed MBS purchases with the primary goal of pushing mortgage rates lower.
Bill says that although the purchases can be an effective monetary stimulus tool, they will likely have "little to no impact on the housing markets." He calls for a more targeted MBS purchase program that focuses on illiquid pools.
To make the most out of these buys, he says the Fed might consider calculating where a loan needs to trade in order for its coupon to generate a specific mortgage rate level. He proposes a program where the subtleties in mortgage pricing and MBS trading are closely considered.
Also in the RMBS realm, players are monitoring the HARP 2.0 program to see how it will increase the number of borrowers eligible to refinance their mortgages, and of course how it's going to bolster prepayment speeds. Sally Ann Runyan in her article examines the expected effect of the newest HARP on speeds in 2012, a topic seen by experts as the major prepayment theme for 2012. Analysts expect to have comparatively more prepayment risk next year than 2011 because of the program as well as other factors that have facilitated the refi process.
Away from mortgages, John Hintze zeroes in on consumer assets, specifically in prime and subprime auto ABS. These have seen strong collateral performance through the downturn, although cracks are starting to show with some of the underwriting terms loosening for both sectors.
And finally, we have a small look at the latest RMBS from Russia and whether it signals a move away from issuance by government-controlled originators.
That's it for now. Enjoy the Holidays!
