Several major securitization-related regulatory topics are surfacing via memos and proposed guidelines sent between the various government agencies.

Last Thursday the Federal Deposit Insurance Corp. distributed to the other members of the Federal Financial Institutions Examination Council a "Financial Institutions Letter" arguing that securitizations from bank regulated entities should not have covenants in them that are based on regulatory events or thresholds, such as an early amortization trigger based on an enforcement action or a bank's capital levels. This topic is presumably associated with the NextBank issue, when the FDIC exercised its prerogative to keep NextCard's outstanding ABS from rapidly amortizing after hitting deal triggers. The FDIC argues that such regulatory action triggers may further damage a banking entity's financial condition, starving off liquidity, among other impacts.

"They are actually getting in on the structuring of deals," a source commented. "What they're objecting to is an early amortization provision based on the condition of the banks rather than the condition of the assets. They're also objecting to the transfer of servicing. That's just crazy."

Additionally, the regulators are taking a close look at whether or not some securitizations by bank entities have embedded implicit recourse, even if those deals enjoy non-recourse treatment. Guidance went out on Thursday morning, with a cover letter from the desk of Scott Albinson, a managing director with the Office of Thrift Supervision.

Cited from the 15 page document, "The provision of credit support, beyond contractual obligations, to securitizations of assets recorded as sold for accounting and regulatory capital purposes is commonly referred to as implicit recourse' or moral recourse.' Through a question and answer format, this document describes certain post-sale actions that banking organizations have taken with respect to securitized assets and provides guidance on whether these actions would be deemed implicit recourse. The document also discusses the risk-based capital implications of conduct deemed to constitute implicit recourse."

The risk of default on newly-originated non-prime mortgages is on the rise because of the weak economy, according to a report by University Financial Associates (UFA). UFA's Nonprime Mortgage Report (NMR) Default Risk Index for Spring 2002 went up to 105 from 99, which was the revised reading for the Index six months ago. A release from the company said that lenders should expect defaults on loans that are now being originated to be 20% higher compared to the average rate of mortgages originated in 1998 and 1999 and 5% more than the average rate on loans originated in the 1990s. The analysis presented was based on a "constant quality" loan---this means a loan with identical borrower, loan as well as collateral characteristics. The Index only tracks changes in economic conditions.

Lehman Brothers released its new GNMA model last Friday. This model will shorten the MBS Index durations by 0.06 years. Lehman brought its GN model more in line with conventionals. Analysts expect little impact on the market from any rebalancing needs due to Index duration changes. For investors that are passively benchmarked to the Index, this should be a complete non-event. However, it will be a bigger issue for the active money managers. To the extent that they are overweighted to the GN sector, their portfolio durations will shorten relative to their benchmark.

The American Securitization Forum (ASF) will unveil its offical website early this week. The page will offer visitors links to sections of the site entitled Organizations and Committees, Initiatives and Activities, Meetings and Events News Archives as well as information on how to join the market special interest group.

"This is a really important step in communicating more broadly with the growing ASF membership," said George Miller deputy director of the Bond Market Association.

The site can be found at, beginning Tuesday.


The global CDO market went from never seeing a hedge fund-of-fund transaction price, to witnessing two deals in one week, via frontrunners JPMorgan and Credit Suisse First Boston. JPM upsized and priced Man-Glenwood Alternative Strategies (MAST I), the first visible CFO backed by hedge fund returns at +70bp/6ML (seven-year bullet) on the triple-A notes. Via CSFB, Investcorp priced its downsized $251 million (from $500 million) deal, Diversified Strategies CFO securitization, also one of the first market value hedge fund CFOs, just one day behind JPM. CSFB priced this transaction 10 basis points inside MAST I, however, at +60bp/6ML on the triple A's, with a five-year bullet maturity.

C-BASS has mandated Deutsche Bank Securities for its fourth cashflow real estate CDO. C-BASS retains the equity in its CDOs so that its deals can jump right into debt marketing. The issuer is likely aiming to capitalize on the tight pricing that other real estate CDOs are capturing, as well as several upgraded tranches from Fitch Ratings on its first deal, reports Thomson IFR Markets.


David Thrope, formerly with Anderson, is joining Ernst & Young. Further details were unavailable, although it is said that several of the accountants at Anderson will make the move over to KPMG, which is acquiring the ailing firm.

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