BOCA RATON, FLA. - As more and more citizens - and non-citizens for that matter - have achieved the American dream of homeownership, the subprime lenders have been played like a fiddle, according to some panelists at Information Management Network's ABS East Conference last week.
"There is a strong possibility that this sector has been gamed by the masses," said Sean Kirk, vice president and trader at United Capital Markets. The strong public push toward credit awareness, Kirk added, has led to what may be inflated credit scores. Offering up an example, he said he was able to raise his own FICO score some 100 points in a matter of two months after discovering a past-due medical bill on his credit report. And as an increasing number of consumers access their credit reports, they too may be propping up their scores, making the average 620 FICO score in most subprime mortgage pools perhaps what years ago would have been a 590. "People know what their credit scores are, they know how to improve it - they know how to game the system," he said.
Most subprime lenders offer credit-counseling services to borrowers, in some cases to borrowers who need help raising their credit score in order to obtain a mortgage.
Tony Lembke, a partner at MKP Capital Management, said he was less concerned with trends underlying upwardly mobile credit scores and more concerned with subprime mortgage underwriting standards, which have, in his opinion, deteriorated. "I would say that within a year, maybe two, below-investment grade classes are going to be struggling," Lembke said. "That doesn't mean it's going to be Armageddon, but it means that you've got to try and be selective."
But while it may be easy to scoff at mortgage originators who continue to issue interest-only, no documentation and hybrid adjustable rate mortgages loans to borrowers with shaky or limited credit histories, it is those providing capital to fund those mortgages - CDOs and everyone else on Wall Street - that is to blame, he added. "We are the ones that allow the I/O loans. It is people in this room that decide where we go," Lembke said.
Philip Wubbena, a vice president at Credit Suisse Asset Management, thinks it is better to invest in 2003 vintage home equity, as long as one monitors for prepayments. He said he is staying away from new issue securities in the sector. Wubbena estimated defaults in the sector could be equivalent to the poorly performing 2000 vintage. "Although credit score has gone up, so has no-doc," Wubbena said. "Current vintage will have losses of between 5% and 6%. I do think there is extension and downgrade risk."
And in newer vintages, the portion of hybrid products leading to payment shock risk was not nearly as prevalent more than a decade ago, pointed out Alex Wei, vice president and senior portfolio quantitative analyst at Delaware Investment Advisors. Wei said performance of those loans could be worse than the 2000 vintage, but fixed-rate loans recently originated could perform better than later vintages. Traders throughout the day also noted the perception of better value in some of the later vintages because of borrowers benefiting from equity buildup from home price appreciation - perhaps enough to offset increased credit enhancement levels on newer issues.
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