Moody's Sees Slow Recovery for Securitization Industry
Collateral performance within the US securitization market will remain weak well into 2011 before achieving any kind of recovery, according to Moody's Investors Service. Troubled performance remains in consumer loan-backed securitizations as long as unemployment stays high and home prices stay depressed, the firm said in market commentary Wednesday. Performance within asset-backed securities (ABS) may improve as government-sponsored lending programs and stimulus efforts take greater effect. ABS issuance, on the other hand, depends on investor interest and evolving regulation. "There is significant uncertainty around changes in disclosure and regulatory regimes for the securitization markets which, along with higher investor risk premiums, will result in increased cost of securitization for issuers," says Moody's senior managing director Claire Robinson. Residential mortgage-backed securities (RMBS) performance will deteriorate into 2010 as house prices fall, "despite some recent signs that the decline is slowing," Moody's said. The firm does not expect investor interest to boost recovery for at least 12-18 months. Commercial real estate loan performance tends to lag in both entering and exiting recession, and Moody's expects this sector to show deteriorating performance into 2011. "Loan delinquency, property value and other underlying performance metrics have deteriorated significantly from their pre-credit crisis levels," Moody's said. These pressures on the commercial mortgage sector may push the default rate beyond 4% before 2010. A significant volume of Option ARMs set to recast by 2011 may further pressuring overall loan performance and pose a greater risk of borrower default. The pressure of delinquency and rising unemployment, along with the foreclosure pipeline, keeps Credit Suisse's (CS) overall outlook on the US housing market cautiously optimistic this week. With overall ABS issuance low as market observers wait to call a housing market bottom, investors are being presented with other options, according to Andrew Akers, managing director and head of advisory, asset management and capital markets firm Capital Markets Solutions at NewOak Capital. “[S]ecuritization is increasingly being used to repair rather than manufacture," Akers said in market commentary this week. "Re-REMIC and other repacking is simply the acknowledgement of the simple fact that under any cash flowing security, the earlier cashflows are less risky than the later ones." Akers added: "Combined with the fundamental aspect of securitization that implements rule-based, structural claims priorities on such cashflows and differing risk-return preferences in the market, most assuredly further completes the financial markets and adds to liquidity.” Write to Diana Golobay. In the October magazine issue of HousingWire, Linda Lowell studies the changing face of the securitization industry and explores the merit of a $1trn Ginnie Mae market.