Could a potential softening of US home price appreciation affect the issuance and performance of the huge asset-backed credit sector?
As leading figures in the asset-backed credit world convened in Phoenix a fortnight ago for Information Management Network's 11th annual ABS West conference, at which Hedgeweek.com was a media partner, the topic attracting most attention was the future of the US housing market.
Although asset-backed issuance has diversified and evolved in recent years, 2005 saw an upturn in the percentage of ABS debt tied directly to the home mortgage market. Large pools of these mortgage-backed securities (MBS) now consist of 'affordability products' such as 40-year term, interest only and adjustable rate mortgages, and negative amortization products, all designed to stretch the ability of borrowers to purchase homes.
While most were in agreement that 2006 should prove benign for MBS investors, some conference goers expressed strong feelings that the market has been too eager to extend credit to home owners, and those who feel that these concerns are overblown.
'We are beginning to see prudent home mortgage deal terms and conditions being replaced by more liberal structures, which we see as a classic sign of sowing problem seeds for the future,' says Mark Zucker, Managing Director,
MBIA, at the conference's opening session.
Adds Paul Colonna, SVP and Head of Structured Products, GE Asset Management: 'With MBS now accounting for nearly 80% of ABS issuance, we are in danger of becoming a one-trick pony. We need to take diversification risk a little more seriously.'
Many who expressed concern, however, also noted positive factors including the continued liquidity into the MBS marketplace, the persistence of demand from borrowers, and the low default rates that has given confidence to lenders.
'Although I am predicting a 20% decline in ABS issuance this year, I have to mention that every year I have predicted that the market will run out of gas, and every year it has found another reserve tank,' says William Haley, Managing Director, ABN AMRO Inc.
Responding to fears that the industry has been too eager to package loans for poorly rated borrowers in the subprime category, Haley adds: 'Lenders are currently using better credit evaluation tools than we have ever had. As a result, I'm not overly concerned that option ARMs and interest only loans will sink the sub-prime market.'
Differences in outlook on the housing market may have fueled some of the volatility in the marketplace seen in the fourth quarter of 2005. 'The era of assured liquidity and deals automatically coming to market, pricing at par, and selling according to plan has come to an end. The uncertainty that first appeared in November of 2005 should serve as a wake-up call for investors,' says Colonna of GE Asset Management.
Many other securitized credit sectors were also given attention at the conference. These include credit card debt, automotive and student loans, commercial equipment and automotive leases, small business loans, insurance premiums, intellectual property royalties, and maritime and rail cargo contracts, among others.
More than ninety panels featuring 400 industry leaders were presented during the four-day conference, which took place February 7 - 10 at the JW Marriott Desert Ridge Resort & Spa in Phoenix.
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