Securitization

The season might be changing, but it won't be enough to lighten the heavy mood that has held the European primary market deal flow at a standstill for much of the year.

Lehman Brothers slashed its target price for Mitchells & Butlers to 235 pence from 450, causing an almost 17% drop in the company's value.

The Bank of Spain moved closer to implementing amendments to its existing securitization law of 1981. The changes have been in the works for the last two years and started getting finalized at the end of 2007.

The tenth series of the North American Investment Grade CDX index (CDX.NA.IG.10) launched into a slightly rosier-than-expected market last week.

Bank write-downs are expected to total approximately $37.4 billion for 1Q08, according to a research note from Meredith Whitney at Oppenheimer & Co.

The primary ABS issuance market did not see a ton of issuance last week: An auto ABS and a couple of modestly sized credit card deals were the highlights.

Structured Finance Advisors, a longtime investor in the mortgage- and asset-backed securities industry, is preparing to launch a short-sale fund that will take a different approach to investing in distressed mortgage assets.

After a brutal market downturn of almost unprecedented proportions, the rate of credit deterioration finally slowed in February.

At the outset of 2008, Fitch Ratings analysts enumerated several reasons why the auto industry needed to keep a vigilant watch over unemployment rates. Not much has changed in the unemployment rate, yet Fitch analysts now seem to have a much rosier, it still cautious, outlook on the auto ABS sector.

Thornburg Mortgage, Inc. plans to float up to $1.35 billion in senior subordinated secured notes, as part of a previously announced funding effort designed to keep it out of bankruptcy. The private placement transaction will involve notes with seven-year durations and will carry an interest rate of 18%. The proceeds from the private placement are to satisfy a contingency of the Override Agreement that Thornburg announced on March 19. Under the terms of that agreement, the mortgage lender and investor agreed to raise $948 million in new capital on or before March 27.

Radian Guaranty, the mortgage insurance business of Radian Group, announced that it will no longer insure "stated income" and "stated asset" loans. This is due to the poor performance of these loans, Radian said. This change will take effect on April 30, 2008 for all new mortgage insurance applications.

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.