Activity in the whole loan market has picked up in recent months, and prices have been bid up to levels seen during the market heights of 1998. Driven by new innovations in ABS structuring by a few major players, the growth has led to a flood of new entrants that has some wondering if this once-lucrative business is worth fighting over.

Increased activity by the likes of Goldman Sachs & Co. and Morgan Stanley has priced out some of the longstanding players in this under-the-radar source of funding for issuers.

For example, it's rumored that market leaders Credit Suisse First Boston and Banc of America may be scaling back participation in the sector, as margins are being squeezed. Both banks are said to be adopting more opportunistic strategies.

"Once Wall Street as a whole starts chasing an idea, that means it's time to get out," noted a source at a leading ABS underwriter whose firm has also reduced its presence in the whole loan market of late.

Prices for an average pool which peaked at 106.00 in 1998 dipped down to roughly 102.00 throughout most of this year, sources said. Prices have spiked sharply in recent months and are now seen as high as 107.00 for some pools.

According to Thomson Financial, self-led ABS issuance - where the majority of these loans are repackaged after being acquired - has increased across the board from levels seen at this time last year. During the second quarter of last year, just $3.2 billion of ABS home equity supply came from investment banks' issuance vehicles. In the second quarter of 2002, self-led home equity issuance totaled over $15.3 billion. This number is slightly skewed by the $4.16 billion offering from Bank of America's EquiCredit shelf, which was backed by loans originated by the since-closed subprime lending unit of the bank.

The long-time players in the market, CSFB and Lehman Brothers, for example, saw self-led issuance increase 73.1% and 77.3%, respectively, compared to second quarter 2001. The newer names in the market, hoping to catch a piece of the arbitrage, are ramping up their businesses. Morgan Stanley's MSDW Capital Trust, which sold just $571 million of home equity ABS in the second quarter of 2001, brought over $1.6 billion in the three-month period ending this June - a 64.8% jump.

This quarter alone has seen over $5 billion of whole loan sales activity, sources said, a significant increase from recent years. Since July 1, over $3.3 billion of this supply has been securitized. MSDW Capital has recently sold $1 billion of securities backed by loans purchased by lenders Option One Mortgage and New Century Financial. The most recent offering was the third for MSDW Capital, backed by New Century collateral.

While the major players are not expected to pull out of the whole loan market, "banks that have been players in the past will pick their spots but they will no longer be wholesale funding sources," the banking source said. "We will either purchase from favored clients or look for favorable risk/reward opportunities."

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