I know the credit markets are frozen but where does everyone see the securitization market going, i.e. CDO’s, RMBS, CMBS, etc…? Short-term is brutal, I know within the next year at least trying to bring one of these deals to the market will be tough since their spreads and prices will be terrible with such a disgust for these securities in the marketplace. Does anyone still work in a underwriter’s role for these deals, has anything come up? I know lending is down but there still are loans out there BAC did 115 billion in 4th qtr. And do the banks want to keep these loans on their balance sheets, didn’t they want to unload these, I forgot what is the benefit of offloading the loans? Seems like these securities would be better off going forward since most loans banks are making now are much more sound then the loans 3-5 years ago. Banks are done at least for awhile lending to someone making 40k a 400k home loan, etc… Thanks for the input!
We are doing stress tests on super senior tranches (those which have never been brought to the marketplace but resided on the balance sheet of the banks) which the banks now want to drop. The junior (equity) tranches of those will vanish, so will the mezz tranche but for the super senior tranche to be hit there has to be a default rate of 15% for five consecutive years. The spreads on those are pretty good and you now have the transparency to drill down into that portfolio and check each and every loan in there. Pretty nice opportunities here and there. These are existing CLO’s, though and not RMBS or CMBS. For the future I certainly see new CDO’s coming to the market although the structures will be different. Junior tranches will be larger and ratings will have to be a lot more reasonable than what they have been in the future. Also, RMBS and CMBS lacked diversification so the correlation within those structures were too great. That will have to be solved for.
s23dino Wrote: ------------------------------------------------------- > I know the credit markets are frozen but where > does everyone see the securitization market going, > i.e. CDO’s, RMBS, CMBS, etc…? Short-term is > brutal, I know within the next year at least > trying to bring one of these deals to the market > will be tough since their spreads and prices will > be terrible with such a disgust for these > securities in the marketplace. Does anyone still > work in a underwriter’s role for these deals, has > anything come up? I know lending is down but > there still are loans out there BAC did 115 > billion in 4th qtr. And do the banks want to keep > these loans on their balance sheets, didn’t they > want to unload these, I forgot what is the benefit > of offloading the loans? Seems like these > securities would be better off going forward since > most loans banks are making now are much more > sound then the loans 3-5 years ago. Banks are done > at least for awhile lending to someone making 40k > a 400k home loan, etc… > > Thanks for the input! Benefit of securitization: 1. Securitized loans are off-balance sheet. Therefore, loan loss reserve are not required for these loans. Huge savings in capital 2. Gain on sale is allowed to be recognized immediately. Future of securitization: It has become more expensive to securitize but still happening. Investors still want the attractive yields. If FASB has its way, by 2011 NO securitization will be allowed. We’ll see about that. Hope this helps…
^^^ Why does FASB want to go away with securitizations? Have they come out and said this?
I have never seen FASB comment on the lack of future securitization. They are merely tweaking the off-BS nature of securitizations and now FAS140 works, aligning it more with FIN46 or even further, IAS off-bs standards, all of which gets rid of the QSPE. Off-BS securitization will exist for quite some time, if only because the ability to get capital relief for billions of assets. It might require selling of the I/O strip, or the servicing rights, keeping only the equity tranche, or it might require keeping it all on B/S, but still getting capital relief. You’ll see prime auto, then cards, followed by RMBS (senior only), and then other asset classes, come in first. Subprime won’t be around for a while. TALF is going to help break the ice. Overall, we really need to see a bottom to the loss rates.
mcpass Wrote: ------------------------------------------------------- > We are doing stress tests on super senior tranches > (those which have never been brought to the > marketplace but resided on the balance sheet of > the banks) which the banks now want to drop. > > The junior (equity) tranches of those will vanish, > so will the mezz tranche but for the super senior > tranche to be hit there has to be a default rate > of 15% for five consecutive years. The spreads on > those are pretty good and you now have the > transparency to drill down into that portfolio and > check each and every loan in there. Pretty nice > opportunities here and there. > > These are existing CLO’s, though and not RMBS or > CMBS. > > For the future I certainly see new CDO’s coming to > the market although the structures will be > different. Junior tranches will be larger and > ratings will have to be a lot more reasonable than > what they have been in the future. Also, RMBS and > CMBS lacked diversification so the correlation > within those structures were too great. That will > have to be solved for. Thanks for the info. CMBS are semi diversified, i.e. geographically, multi-family, industrial, office, etc… RMBS pretty much just geographically. But I don’t think they need to be diversified, people add RMBS and CMBS to a portfolio of stocks and bonds, etc… and that entire portfolio becomes diversified. CDO’s are a little more diversified but most of the securities in those deals are CMBS and RMBS, CLO’s are a little different, and you need CMBS and RMBS securities to roll into a CDO, and yes I know some CDO’s can buy different securities.
s23dino Wrote: ------------------------------------------------------- > Thanks for the info. CMBS are semi diversified, > i.e. geographically, multi-family, industrial, > office, etc… RMBS pretty much just > geographically. But I don’t think they need to be > diversified, people add RMBS and CMBS to a > portfolio of stocks and bonds, etc… and that > entire portfolio becomes diversified. CDO’s are a > little more diversified but most of the securities > in those deals are CMBS and RMBS, CLO’s are a > little different, and you need CMBS and RMBS > securities to roll into a CDO, and yes I know some > CDO’s can buy different securities. RMBS aren’t really diversified, especially considering the volume of sh!t that came out of CA, FL, AZ, and NV, which made up more than 50% of the RMBS issued. CDOs were an evil joke played upon people. The abortion of securitization, known as a CDO, should never have been used as such. The problem with securitization of RMBS or CDOs, is that the correlation between the assets gets much higher as underwriting gets much lower. CDOs are worse considering the correlation gets higher as RMBS’ perform worse. The biggest problem with this situation was securitization itself. Originators didn’t have responsibility for the assets originated. Not to mention nobody considered higher correlations as debt issuance becomes more common (higher debt loads leads to higher overall defaults), nor the higher correlation of a bubble mentality. Overall, diversification didn’t eliminate the risks it was intended to. Pooling is great, but only if you can understand where the data might be going. If the world changes and your new assets outstrip your old data, you’re fooked.
I don’t think diversification is the major problem with the future of securitization. They don’t need to be all that diversified. Yes the major problem 2-5 years was the underwriting of the loans, banks didn’t give a crap about those loans (since they were going to off-load them) so they didn’t do enough due diligence and gave loans to less then credit worthy companies and people. My contention is that over the last 8-12 months and going forward banks are much more strigent on who they will loan to, thus securitizing these loans going forward will help CMBS and RMBS be much more stable. Also, underwriter’s should be much more careful on the loans they are pooling into the deals. Let’s focus on the original thread and the future of seccuritization and not the past too much. -Thanks.
spierce Wrote: ------------------------------------------------------- > I have never seen FASB comment on the lack of > future securitization. They are merely tweaking > the off-BS nature of securitizations and now > FAS140 works, aligning it more with FIN46 or even > further, IAS off-bs standards, all of which gets > rid of the QSPE. > > Off-BS securitization will exist for quite some > time, if only because the ability to get capital > relief for billions of assets. It might require > selling of the I/O strip, or the servicing rights, > keeping only the equity tranche, or it might > require keeping it all on B/S, but still getting > capital relief. > > You’ll see prime auto, then cards, followed by > RMBS (senior only), and then other asset classes, > come in first. Subprime won’t be around for a > while. > > TALF is going to help break the ice. Overall, we > really need to see a bottom to the loss rates. TALF is what?
kutta2102 Wrote: ------------------------------------------------------- > s23dino Wrote: > -------------------------------------------------- > ----- > > I know the credit markets are frozen but where > > does everyone see the securitization market > going, > > i.e. CDO’s, RMBS, CMBS, etc…? Short-term is > > brutal, I know within the next year at least > > trying to bring one of these deals to the > market > > will be tough since their spreads and prices > will > > be terrible with such a disgust for these > > securities in the marketplace. Does anyone > still > > work in a underwriter’s role for these deals, > has > > anything come up? I know lending is down but > > there still are loans out there BAC did 115 > > billion in 4th qtr. And do the banks want to > keep > > these loans on their balance sheets, didn’t > they > > want to unload these, I forgot what is the > benefit > > of offloading the loans? Seems like these > > securities would be better off going forward > since > > most loans banks are making now are much more > > sound then the loans 3-5 years ago. Banks are > done > > at least for awhile lending to someone making > 40k > > a 400k home loan, etc… > > > > Thanks for the input! > > > Benefit of securitization: 1. Securitized loans > are off-balance sheet. Therefore, loan loss > reserve are not required for these loans. Huge > savings in capital > 2. Gain on sale is allowed to be recognized > immediately. > > Future of securitization: It has become more > expensive to securitize but still happening. > Investors still want the attractive yields. If > FASB has its way, by 2011 NO securitization will > be allowed. We’ll see about that. > > Hope this helps… are you on drugs? even under IFRS securtization is allowed, its just how you record the transaction. there will be none of this sneaky OBS securitization bullsh*t that happens now because a rules based system is too slow and narrowly focused to appropraitely account for it.
i have not read every message above…so apologies if i repeat securitization would neve thrive as it did in the past arbitrage CDOs are dead, in the hindsight from an average collateral of BB you could have carved out 80% AAA this cannot happen in the future hence there is not that much for the cdo/clo manager thus he cannot give 1-1.5% upfront for the bank to structure and warehouse it, additional 1% to underwrite it. There wont be much for the banks too the securitization would take place only for the flow reasons where bank want to remove the assets from its balance sheet so that it can originate further assets and capture market share.
sameeragarwal Wrote: ------------------------------------------------------- > i have not read every message above…so apologies > if i repeat > > securitization would neve thrive as it did in the > past > > arbitrage CDOs are dead, in the hindsight from an > average collateral of BB you could have carved out > 80% AAA > > this cannot happen in the future hence there is > not that much for the cdo/clo manager > thus he cannot give 1-1.5% upfront for the bank to > structure and warehouse it, additional 1% to > underwrite it. There wont be much for the banks > too > > the securitization would take place only for the > flow reasons where bank want to remove the assets > from its balance sheet so that it can originate > further assets and capture market share. There are hundreds of billions of other assets originated every year. You seem to think that mortgages pushing into CDOs is the only engine that drives the securitization market. What about the CC master trusts which must securitize between 50-100bn of bonds per year? Auto loans? Auto leases? Floorplans? What about the rental car companies with tens of billions outstanding? Leases? Construction equipment? Fleet leasing? Trade receivables (tens of billions there that are in the conduit market). While CDOs drove mortgages, even mortgages won’t disappear. You pin a whole thing on mortgages but forget about every other asset class out there. As far as warehouse to term. Conduit markets aren’t going away, even with the high spreads demanded.
all the ABS you are talking about is for balance sheet and flow reasons, there is not much money to be made and with a long history of defaults, the lower most unrated tranche has to be substantial, that securitization would take place but that is not the problem problem is excess leverage the root cause of which is underlying middle market loans which are hard to be rated but are rated anyways and thus qualify to be a part of pool
Agree with spierce but I think there is even a larger context here. “Securitization” has been wildly successful even in our current melt-down. One way to look at it is that there are plenty of healthy banks left in the US now - virtually every mom and pop bank that has 14 branches and a boring business strategy was largely unaffected by the meltdown. There was some interview in the paper the other day with the guy who owns a local Fairfield county bank and he was nearly giddy at the demise of all the large banks. During the great Depression there were thousands and thousands of bank failures. So far in this debacle we have had (I dunno) 15 (but admittedly they have been pretty important failures). Securitization endures fine. “Tranching” credit risk is a little suspect now, but it’s still a decent idea. The world just needs to put the proper underwriting and modelling together and change some of the antiquated paradigms that went with it (for example, rating agencies did a terrible job with all of this). But the idea that risks can be pooled and somehow decomposed into highly credit worthy parts and very credit unworthy parts has to be true. Decomposed risks being distributed to people with different risk tolerances flows directly from that. I think tranched risks is the way that we capitalize all the billions of projects in the world that need to be capitalized but can’t be because the risk is harder to assess than decompose. I think tranching is back too. But the broader problem is that we are unwinding the capitalization, value, liquidity, etc. of every complex risk in the world right now. Hedge funds, arbitrage CDO’s, etc. served a fine function by buying and holding stuff that is valuable but didn’t fit in most other investment vehicles. What happens if we go into a depression but we have defunded (or even criminalized) all the vehicles that buy distressed assets? How many companies have come to a soft landing or even become reborn because some turn-around fund recapitalized the business and rethought the business model? We really need to try to separate risk that is useful and necessay for economic growth and function from risk that is created just so people can trade it. I think most of this mess was caused by people creating needless risk (“Please refinance your home and go buy stupid stuff so I can take on that risk”) and yet all risk is getting vilified.
To SeanC: I will choose to ignore your comment about me being on drugs. Therefore, please educate me on what benefit will securitization provide if the off-balance sheet feature is removed? The loan loss reserve calculation is based on the on-balance sheet assets - in the hayday of securitizations, more than 70% of assets were off the books (auto loans, credit cards, mortgages - you name it) requiring banks to hold reserves for the remainder amount. Spierce, you are correct - I wasn’t correct about FASB getting rid of securitizations. They did talk about bringing the assets back on to the BS, I think. However, it can’t happen anytime soon given the reality of the situation.
I agree with someone’s earlier comment about CDO becoming an abortion of securitization but think that the ratings agencies were the catalysts in this. There is a huge conflict of interest in that business model but not sure what will fix it. I’m sure most of us have read the classic exchange between the employees at one of the rating agencies!
Isn’t a benefit of securitization that people with smaller portfolios can diversify their risk exposures better? What I mean is, you don’t have to have $500,000 to lend someone for their home in order to get the diversification benefit of having exposure to mortgages? I realize that the big problem has been how to calculate what that risk actually is, and how much it should pay to bear it, but that’s a question of how to implement securitization, rather than whether one should have it or not.
Good discussion. I’m not sure if the distiction between CDO’s and CMO’s is being made here. Shouldn’t we refer to CMO’s when we are talking about home mortgages? Don’t CDO’s refer strictly to non mortgage structures? Or do people in the business just call them all CDO’s?
CDO’s refers to everything (collateralized debt obligation), CMOs, CLOs are more specific types of them. Interesting comment earlier on by Mcpass, I agree that CLOs are starting to look pretty interesting on the AAA side, but when you say they can withstand 15% defaults for 5 years you are assuming a recovery of what 65%? The problem is that the recovery rates the market has been seeing on recent defaults is more in the 40% range, similar to the bond CDOs that blew up a while back. Not saying that in the low 70’s some AAA CLO paper isn’t very interesting, but the portfolios vary incredibly by deal and vintage (but at least you can look at underlying collateral and understand it in CLOs vs. the CMOs that are two fragmented to get a true picture of)