ABS

Manager Activity: AutosFull Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market

The registration for American Securitization Forum's ASF 2009 opens tomorrow, March 28. The conference will be held Feb.8-11, 2009 at The Venetian in Las Vegas. Online registration can be done through the ASF Web site at http://www.americansecuritization.com/story.aspx?id=2282

The Office of Federal Housing Enterprise Oversight has changed its course in terms of the conforming limit amount. OFHEO said that based on comments received in two public comment periods, the regulator is issuing a final guidance on loan limits. The guidance provides the conforming loan limit would not drop from its current $417,000 level in 2009 and subsequent years. But, the OFHEO said that the conforming loan limit will not rise until cumulative increases in house prices go over cumulative decreases since the $417,000 limit was first reached.

New home sales dropped in February from upwardly revised December and January numbers. According to RBS Greenwich Capital, to have upward revisions to November through January is a very encouraging sign. This is because revisions to these data tend to be considerable and very market-directional. In other words, these are generally upward when the trend is up and vice versa. RBS said that significant downward revisions have been the norm for these data for nearly two years now. While February's level of new home sales is officially the lowest in 13 years, extending the downtrend, the February print of 590,000 is actually pretty much flat versus the initial January reading of 588,000. Not unlike existing home sales, RBS said it is too early to get overly excited, but analysts are encouraged by the February sales figures that our call of a bottoming out of home sales by mid-year will come to fruition, although at lower clearing prices than what was expected six months ago. Combined existing and new home sales rose by 2.3% in February, which is the first significant gain in a year, RBS said. "It's a start, but we will need to see more than one monthly blip to really gain any confidence," analysts wrote. In a related report,Merrill Lynch analysts said that even with the current jump in mortgage purchase applications, the numbers are still only up about 0.4% from the February levels. The figures are usually driven upwards by borrowers filing multiple applications. Many of these application are probably going to be turned down as tight lending standards are limiting credit availability. Indeed, since 2006, there is a clear disconnect between mortgage application volumes and new home sales, Merrill analysts said. This is a relationship that was very tight in the last 15 years, they noted. The March National Association of Homebuilders report indicated that neither buyer traffic nor present single family home sales improved from February levels. This is why Merrill does not see any compelling evidence of a firm March print for new home sales. Separately, Merrill Lynch analysts also stated that median new home prices jumped 8.2% month over month, although this was probably the result of more sales of higher value homes, skewing the median price higher. However, Merrill analysts said that the better home sales activity, failed to put a dent in inventory levels as months' supply stayed at 9.8 months, which is the highest since October 1981. Also, the number of months it takes builders to unwind finished product was running at 7.2 months, which is 38% above February of last year.

There's finally some good news in the March remittance reports -- the pace of credit deterioration is showing signs of slowing, said analysts.The report, which summarizes the March remittance data for the 80 subprime RMBS transactions referenced by the ABX indices, showed that severe delinquency rates (i.e. loans that are 60 days delinquent or worse) increased across all four ABX series during March. The rates reached 34.1%, 32.5%, 28.1% and 23.1% for the 06-1, 06-2, 07-1 and 07-2 series, respectively, reported Deutsche Bank Securities analysts. They also stated that the severe delinquency rates for several deals in the 06-1 series are currently in the mid to high 40s. Despite the bad news, however, the March data actually indicated that the pace of deterioration is finally slowing. Specifically, Deutsche pointed to the increase in the severe delinquency rate dropping from 2.32% to 1.60% for the 06-1, 2.63% to 2.21% for the 06-2, 1.98% to 1.40% for the 07-1 and 2.61% to 2.04% for the 07-2. Analysts said that the voluntary prepayment speeds have collapsed. Those for the 06-2 series dipped to 14.9% from 18.1% in March, even with most of the underlying mortgages currently approaching their rate resets. Prepayment speeds for 06-1 slowed from 14.1% to 10.9%, while the speeds for 07-1 and 07-2 slowed from 8.3 to 7.1 and 7.6 to 7.2, respectively, said Deutsche. The cumulative loss rates are still heading northwards, analysts said, with 06-2 currently at 2.21%, and 06-1 not far behind at 1.95%, said Deutsche.

Late yesterday, Fannie Mae reported 1% growth in its retained portfolio to $721.6 billion in February, improved from negative 4.8% in January. Year-to-date, the portfolio's growth has been negative 2.0%. Earlier this morning, Freddie Mac said its retained portfolio contracted 12.4% in February to $709.5 billion. Year-to-date, its portfolio has shrunk 9.4%. Fannie Mae's modest growth came from a $4.2 billion increase in mortgage loan holdings. Fannie Mae holdings declined $3.1 billion, while non-Fannie Mae MBS holdings stayed almost the same. Freddie Mac's contraction was largely a result of nearly a $7 billion decline in Freddie Mac holdings and a $3.7 billion decline in non-Freddie Mac non-agency holdings. Meanwhile, mortgage loan holdings rose $3.6 billion. Total Fannie Mae MBS issuances were $69.4 billion in February, up from $49.1 billion in January. After liquidations, the net increase was $42.4 billion compared to $23.2 billion previously. Freddie Mac reported guaranteed PCs and structured securities issued totaled just under $43 billion, up from $29.5 billion in January. After liquidations, the net increase was $21.6 billion versus $11.4 billion previously. With the recent reduction in the capital surcharge from 30% to 20%, the market is anticipating some amount of growth in both GSEs' retained portfolios. Lehman Brothers analysts estimated this week that the reduction of the capital surcharge and potential additional capital raised could increase the amount of aggregate surplus capital to $19 billion. But given credit losses and a growing guaranty business, analysts estimated only around $4 billion of this being used for retained portfolio growth. JPMorgan Securities analysts, meanwhile, said that under the 20% capital requirement they do not really see an increase in the capital available to grow the retained portfolio at this time.

The board of directors of the European Securitization Forum (ESF) has elected Steve White as its chairman for 2008. White is co-head of European securitization for Morgan Stanley in London. "We are very pleased that Steve will lead the association at such a crucial time in the structured credit market," Rick Watson, managing director of the ESF said. "The association's work plan and focus is on restoring normal liquid market conditions. Steve's demonstrated experience in the European capital markets as well as his extensive network of investor relationships will be key to spearheading the initiatives that the industry is currently undertaking to improve transparency and restore investor confidence." Robert Palache had previously been elected to chair the ESF for 2008 last December. Palache was managing director and the head of European securitization and asset monetization group for Morgan Stanley in London but resigned from the bank earlier this year.

2008 2007 2006 ABS (Public + 144A) 46,578.5 256,457.6 231,953.2 ABS (Public + 144A excluding CDOs) 42,565.3 175,182.5 178,321.5 ABS (Public Only) 35,702.1 131,164.6 147,631.0 ABS (144A Only) 10,876.4 125,293.1 84,322.2 Non-Agency MBS 10,396.3 154,667.0 129,678.2 Agency MBS 32,170.6 35,405.0 50,563.1 CMBS 4,536.0 46,490.1 34,837.6

With JPMorgan scooping up 85-year-old Bear Stearns last week for $2 per share, it is safe to say that deteriorating credit conditions and market jitters continue to hack away at the U.S. economy.

Banks and insurance companies that issue trust preferred securities are now highly sensitive to financial institution risk and have acquired a distaste for the CDO structure, which has pooled these securities.

Last week started off promisingly enough. The Federal Reserve gifted the credit markets with a 75-basis-point rate cut and provided more liquidity in the form of the $200 billion term securities lending facility. Also, the industry absorbed news of JPMorgan Chase's bargain basement buyout of Bear Stearns, rescuing the investment bank from total failure.

The Federal Reserve-orchestrated fire sale of Bear Stearns to JPMorgan Chase has forced the market to come face to face with the prospect of massive government bank bailouts, and of what it could mean to taxpayers.

With Bear Stearns' fate far from determined, the future of the bank's Latin American structured finance business is likewise uncertain.

Morgan Stanley and Royal Bank of Scotland are working on Bishopsgate Asset Finance Series 4, a corporate bond repack for Thames Water Utilities. The underlying collateral is expected to have a triple-B- plus rating, and the deal will be denominated in sterling. The transaction is expected to be launched in the near term, depending on market conditions.

Northern Rock said last week that it plans to become a smaller, more focused mortgage and savings bank. However, it still intends to continue with its securitization business.

Two major investment banks, Lehman Brothers and Goldman Sachs, reported first-quarter earnings last week. While the two banks may have beaten analysts' estimates for the period's performance, both acknowledged significant RMBS losses and credited client activity with buoying their fortunes.

Earlier this year, during an industry conference, representatives of Wilshire Credit Corp. were said to be scouting for capital partners willing to purchase whole loans, while giving it the servicing rights.

When Standard & Poor's an-nounced that write-downs related to subprime losses might be nearing an end, it should have caused at least a brief rally in the market simply because good news has been so rare over the past months.

XL Capital Assurance's (XLCA) parent company Security Capital Assurance (SCA) responded to a lawsuit filed yesterday in New York by Merrill Lynch, accusing XLCA of refusing to cover losses on $3.1 billion in seven CDOs that the company had written swaps on. SCA said that it had terminated XLCA's contracts with Merrill Lynch due to a breach of contract in the obligations by promising control rights in the investment to various parties. "Merrill had repudiated its contractual obligations to XLCA by committing to provide one or more third parties with the same CDO control rights that it had previously promised to XLCA." As a result, SCA said that is in not obligated to make these payments. Quinn Emanuel Urquhart Oliver & Hedges will represent SCA in court.

Advisory firm Westwood Capital has launched a hedge fund which will patronize a segment of the mortgage market that most investors are avoiding. The New York City-advisory firm created the fund in a partnership with ARC Global Partners, also of New York, and has begun bidding on loans. The targeted assets: first-lien, owner-occupied, nonperforming loans in the 60-day-plus delinquency bucket, according to sources familiar with the situation. At its bare essentials, Westwood's strategy is to pick up the loans at a discount and use its servicer, which was not named, to get the loans to reperform. To spearhead the initiative, Westwood appointed three industry veterans. Morton Dear, former vice chairman of The Money Store, is chairman of the new fund; Evan Mitnick joined as president. Mitnick joined Westwood Capital in June 2007 after leaving New Century Financial, where he was a senior vice president. Mitnick was also a director at Citigroup Global Markets.