Renewal, Regulation, Reticence, Republicans and Regurgitation
The ninth annual American Securitization Form at the modestly opulent J.W. Marriott Resort in Orlando Florida finished last week with more optimism than last year’s funeral dirge in Washington DC. Last year’s ASF conference participants nervously waited for the U.S. government to impose the new rules of the road for the securitization market. The securitization market was in the middle of its second year of limited securitization. To compound the lousy mood was the decision by ASF to hold the conference at the remote National Harbor in a southern Washington DC suburb.
Let’s not forget ASF membership participated significantly in the collapse of the US housing market and the overall economy. The originators, aggregators, servicers, sell side, buy side and CDO managers earned their money by the funding of mortgages riddled with fraud or to unqualified homeowners. Market participants earned the wrath of populist elected democrats. Bush’s ownership society programs helped to facilitate the problems. Last year, we were talking QE2 and Federal Reserve over purchasing of Agency MBS. Fannie Mae and Freddie Mac, in their second year of conservatorship, played a part in the administration’s effort to stem the wave of foreclosures to slow down home price depreciation.
Last year the conference was run by lawyers and this year it was run by deal people, therefore the parties were way better. Well not all the parties but at least the alcohol was flowing. The Naked Bond Bear crashed … err … attended several of the dealer parties for the benefit of you dear reader. Optimism for the functioning markets (Commercial Mortgage Backed Securities, Credit Cards, and Prime Autos) allowed JP Morgan to rent a pool table in its hospitality suite.
Renewal – sort of…
Many parts of the securitization markets are returning from tepid to low volumes (when compared to 2005-6). Last year investment banks issued ~$8 billion of CMBS (not including $3.5B of Freddie Mac K-deals). Citi expects CMBS issuance to be $12B in the first quarter of 2011. Seasoned CMBS senior tranches speads to swaps have tightened from a high of 1,200 in 2008 to 215. (These bonds were originated at a 1 mo LIBOR + 15-25). Auto ABS and Credit Card securitizations are growing at the same pace. According to Citibank’s research, $15B of consumer ABS were issued in 2010 while $9.8B will be issued by the end of February! Even CLOs are seeing a tremendous boost of liquidity, missing since July 2007. Every panel’s future looking statement on these asset classes were positive discussions of growth and renewal.
The missing asset in this massive group hug is the largest of the asset classes: residential mortgages. Only one private label RMBS originated in 2010 for a whopping $255 million by Redwood Trust and no RMBS are expected to be originated in 2011. One very optimistic research analyst predicted $20B of RMBS issuance in 2012. Why are 95 percent of residential originations being securitized through Fannie Mae, Freddie Mac and Ginnie Mae? Why are banks originating jumbo mortgages (over $729k in high cost areas) only 25-37.5 basis points over agency loans? Why do the super bowl half time shows continue to deteriorate after the famous wardrobe malfunction? Three reasons: Regulatory uncertainty, investor reticence, and the juicy net interest margin returns on portfolio jumbo mortgages.
Next post will discuss the uncertain regulatory environment.
And someone is going to get punched in the face if one more 20-something Harvard-MBA junior trader says “This time pro-forma underwriting will be different”.