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| NEW YORK — The good news is that investors have started to return to the securities market, according to panelists at a securities conference Wednesday. The bad news is that they’re so far steering clear of subprime mortgage-backed securities. But banks may step in to put some of the lost product in their portfolios.
Investors began to slowly buy securities again in recent weeks and days, especially the last few days, possible in anticipation of the Fed’s move, according speakers at the American Securitization Forum’s Securitization Summit yesterday in New York City. The Fed’s 50 basis point rate cut Tuesday helped boost market activity, speakers agreed, noting greater liquidity yesterday morning. “The world changed a lot in 24 hours,” said Ralph C. Daloisio, managing director for Natixis. While the large and unexpected rate is a big help, its long-term impact remains uncertain, he added. What is certain is that subprime housing difficulties will last for years, according to speakers. “These credit problems will be with us for many years,” said Anthony Thompson, managing director, Deutsche Bank Securities Inc. “These are long-dated assets. We’re going to be talking about these 2006 RMBS in 2008 and 2009.” “The subprime problem won’t be gone soon,” agreed Greg Reiter, director of MBS Research at UBS. “It’s not a matter of the Fed rates as far as subprime goes.” Still, the problem should be put in perspective. Out of $22.4 trillion of outstanding mortgages, $10 billion are in MBS. And of those, 13 percent are subprime, Reiter said. “That’s not a tiny number, but it’s not everything.” “Reintermediation will be the buzzword,” Daloisio predicted, saying banks will fill the mortgage gap, holding more product instead of selling it for securitization. FHA and the GSEs will also get busier, he said. With home price appreciation negative across the country, defaults will increase, he said. As foreclosures increase and more loans reset, servicers will face more loan modifications and increasing costs. The standard 50 basis points for servicing may not be enough for some. “Servicing platforms could become an issue,” he said. “We can’t have this happen in servicing because it would just be a total disaster.” Like many others have, the panelists struggled to explain why securities sales, even those outside subprime mortgages, practically came to a standstill this summer. A credit event, namely a spike in subprime mortgage delinquencies that was aggravated by a deteriorating housing market, led to a liquidity event, said Robert Seery, senior vice president for the GSC Group. Plus, problems were found in underwriting guidelines and lending processes. Frightened by headlines bearing bad news, investors examined securities and suddenly found they didn’t completely understand securities structures. Without that comfort level they refused to buy, and spreads widened dramatically, and liquidity drained from the market. The public, including investors outside the small securitization circle, lack a complete understanding of securitization structures and their risk levels, panelists noted. Rather than taking them for granted, securities players must do a better job educating outsiders and explaining, in simple terms, how securitization structures work. Although industry critics allege a lack of transparency, substantial information is available, including thorough rating agency descriptions of transactions and monthly reports on the deals. The real problem is a lack of understanding, according panelists. Some investors don’t appreciate the differences in the many structures and their different risk levels. Others don’t realize some investments protect them against losses of the underlying collateral, and some may also over-rely on rating agency reviews. The types of structures will become fewer and those that survive will be simpler, panelists predicted. |
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Michael Kling is a seasoned mortgage journalist and the former editor of Secondary Marketing Executive. e-mail: Michael@KlingPublications.com |
