The 2013 Winter Conference for the American Securitization Forum was remarkable for a number of reasons. For a start, the fact that more than 5,200 people attended the world’s largest investor conference is certainly a vote of confidence for the long moribund securitization market.
The good news is that investor interest in asset-backed securities and housing ABS, particularly, is rising rapidly. But the ABS market of 2013 and beyond will be very different from the pre-2007 market.
One of the more interesting ASF sessions was entitled “2013 Securitization Outlook.” Most of the panelists identified the collateralized loan obligation market as the most active sector in ABS after auto finance paper. Credit card volumes are down and this has affected the willingness of banks to sell paper to investors. Several panelists expect to see more of a push by banks this year to grow credit card volumes and income. Look for more mail from Chase, Citi and Capital One, for starters.
All of the panelists agreed that spreads in the CLO sector remain wide and have offered relative value vs. agency, auto paper, credit cards, but the lack of new production is finally going to see CLO spreads tighten this year. Think of the recent buyout of Dell Computer as providing potential fodder for Wall Street’s CLO underwriting machine. All the panelists agreed that the major ABS classes have seen improvements in underwriting and credit quality over the past several years.
With the end in sight on finalizing some of the many new rules and regulations governing mortgage ABS proposed since 2010, several panelists anticipated that volumes would pick up this year. Peter Sack of Credit Suisse predicted that a number of new issuers would enter the RMBS sector in 2013-2014. While he does not expect to see products of the bad old days return, he does think that the strong investor bid for assets gradually will create supply.
A number of panelists commented that the REO-to-rental trade, including new structures such as real estate investment trusts, will gradually produce new and different ways to manage structural risks in these deals. These risks include property management, cash management and the risk of sponsor default as risks for REIT investors now entering the market, but these issues were seen as manageable by most of the panelists.
Several participants on different panels commented that mortgage servicing rights are a very hot asset class and another area for the use of REIT structures. But they worried that the risk of servicer termination may prevent the class from winning broad acceptance with retail investors. Servicer advances were also touted as a very promising area, both in this panel and others later in the conference. Using a pool of loans for repayment, for example, is an easier sell for investors than participating in operating cash flow via MSRs.
Gagan Singh of PNC Bank, for example, said that with the right structure, advances can be a solid investment grade asset. Singh also said that 2013 will be a much better year for credit overall. He sees the gradual de-levering of consumer households and enhanced ability to service debt due to Federal Reserve rate policy as big positives for housing. He also speculated, even before the Dell deal was announced, that demand for paper may push/pull increased leveraged buyout activity to feed demand for CLOs.
Another very interesting panel was entitled the “Impact of New CFPB QM Rule.” The session started with an official statement read by Peter Carroll, assistant director of the office of mortgage markets as the Consumer Financial Protection Bureau. He attempted to alleviate concerns regarding many aspects of the qualified mortgage or “QM” rule, but with limited success.
Carroll indicated that there are no “bright line” provisions in the rule intentionally, leaving implementation to the lender. He said that the CFPB does not want to discourage non-QM lending and that such loans should naturally be 30% of the market over time. He also stated that the CFPB does not believe that litigation risk on non-QM rules will be greater than litigation today under the Truth in Lending Act. Interestingly, Carroll encouraged members of the audience to call him directly at the CFPB to continue the dialog.
Scott Samlin of SNR Denton noted that the “ability to pay” rule enshrined in Dodd-Frank has been in place for three years via the Fed. He also expects that loans which fall outside of the QM rule’s safe harbor but under the rebuttable presumption will be made with no significant problems in terms of litigation. The clear message here is underwrite all loans as per the QM rule, even if the coupon ultimately takes the loan outside of the QM criteria.
Michael Molloy of Bank America Merrill Lynch complained that the three criteria he sought from CFPB a year ago at ASF have not come to pass: 1) bright line definitions for the QM rule, 2) protection from litigation and 3) as broad as possible QM rule. The big questions, he believes, are still 1) protection from litigation, 2) how prove compliance with QM after the fact and 3) if we can prove compliance, what will the courts do with the QM rule?
Gyan Sinha of KLS Diversified Asset Management raised some important questions with respect to the government sponsored enterprises and QM. He noted that QM does address ability to pay, but that getting investors to return to the non-QM market will rely on the old rules of capacity, character and collateral. If we were to reduce the role of the GSEs in the market, he asked, what would it look like? For one point, we must “create a new secondary market standard” that includes a private TBA market. The TBA market, Sinha argues, is the key contribution of the GSEs to the RMBS markets today.
The best question came at the end, when Eric Kaplan of non-bank lender Shellpoint Partners asked “what about prime, non-QM loans?” He said there are significant numbers of loans that will fall explicitly outside the QM rule but will still be considered prime by investors and markets. The 1.5% spread over the benchmark rate was not high enough, Kaplan argued. Carroll, for his part, nodded his head and took copious notes.
I followed up with a question to Carroll on Kaplan’s point at the end of the session about how the 1.5% spread over the national prime mortgage rate for high priced loans came about in the CFPB deliberations. Non-banks which pay market rates for warehouse funding might argue that a < 6% coupon is not particularly expensive — especially given that Dodd-Frank now outlaws prepayment penalties for all non-QM loans (and effectively for all loans). Carroll confessed that the 1.5% spread came from the Fed’s earlier deliberations in 2008 regarding regulations on ability to pay. Sinha agreed that the 1.5% spread was a legacy going back decades. Carroll from the CFPB took more notes, but we should all ponder whether the CFPB rule regarding the price and other attributes of non-QM loans will help or hinder the return of investors to the non-agency market. I will be writing about the “high priced loan” issue next month.
