FT: Subprime hangs over securitised
debt revival
By Jennifer Hughes in London and Aline van Duyn in New York
Published: June 9 2011 20:32 | Last updated: June 9 2011 20:32
From Barcelona and Cannes to Brussels, via an anonymous hotel on London’s Edgware Road.
The different locations for the securitisation industry’s global gathering, which takes place next week in Belgium, are a metaphor for its own fortunes: from the glitz of its boom-era partying around the Mediterranean to its recent two-year hibernation in an unglamorous corner of London.
The industry has signalled a tentative renaissance with its move to Brussels. Its basic business – repackaging bundles of illiquid loans, such as mortgages, into new securities – is cranking up, slowly.
Yet the choice of Europe’s political and regulatory capital highlights the challenges the market in securitised deals still faces.
More than two years after the market imploded as hundreds of billions of dollars of “safe” securities linked to US mortgages plunged in value, bankers are beginning to ask: has it embarked on a gradual recovery or is this stripped-down, muted version of securitisation now the “new normal”?
The answer matters because of the role securitisation plays in the wider economy by freeing up banks’ balance sheets to extend fresh credit. Before the financial crisis, more than half of the $5,655bn borrowed in the US credit markets by companies, banks and consumers was financed through asset-backed securities.
“The real point, however, is not about restoring securitisation itself,” says Alexander Batchvarov, head of structured product research at Bank of America Merrill Lynch. “The point here is restoring bank lending to consumers, and securitisation is, at its heart, a tried and tested means of helping that happen.” He is “very, very cautiously optimistic” that policymakers are beginning to understand.
“We’re still facing very strong headwinds from regulation but also simply from misperceptions about the product – in Europe they think it is all about US subprime and it is not at all,” he says.
Bankers are still struggling to make the point that not all securitisations are the same. Only 0.07 per cent of European residential mortgage-backed securities have defaulted, for example, compared with a rate of 9.62 per cent in the US, according to Standard & Poor’s, the rating agency.
“People need to be clear about the difference between market performance and underlying value,” says Olivier Renault, head of structuring and advisory at StormHarbour Securities. “The market moves have been horrendous but the actual realised losses on the underlying loans, particularly in Europe, have been very subdued. There hasn’t been the wave of defaults that was implied by the market values.”
Perceptions are not the industry’s only problem. Investors are returning only slowly and large chunks of the buyer base in both the US and Europe, such as banks’ off-balance sheet vehicles, have gone for good.
In Europe, the sluggish state of the market was made clear this week in data that showed more than half of outstanding securitisations were held on banks’ balance sheets – thereby negating their role in shifting loan risk from banks. Instead, banks were reduced to using the bonds as collateral for short-term loans from central banks.
Total market activity in the US is far greater than in Europe but the only mortgage-backed bonds being accepted by investors are those backed by US government guarantees. New sales of private sector mortgage-backed bonds remain largely absent.
Whether the private US mortgage-backed securities market ever returns is still unclear. A huge number of new rules are being considered by regulators with the aim of making the securitisation world safer and more transparent. But bankers have warned that these well-meaning efforts could kill off this type of funding by making it too expensive.
Regulators want the underwriting of new mortgages, for example, to be done responsibly. To encourage this, new laws require those repackaging loans to retain some of the new bonds through so-called “skin in the game” rules.
In the US, regulators have devised a plan that would require those who structure the deals to keep a slice of every loan they repackage. In addition, they have proposed a “premium capture account” that would eliminate the ability of banks to recoup the costs of originating mortgages. As a result, it might push up interest rates, require higher downpayments and make private financing a less viable alternative to government-backed mortgage agencies such as Fannie Mae and Freddie Mac.
“The premium capture rule, as proposed, would permanently shut down most residential and commercial mortgage-backed securitisation,” says Tom Deutsch of the American Securitisation Forum.
The mood in the US market is, therefore, rather sombre, even though many market participants were reasonably optimistic in February, when thousands gathered at an industry conference in Orlando.
Lewis Cohen, partner at Clifford Chance in New York, says: “Months of market torpor and fatigue from battling a US risk retention proposal that was far wide of the mark have taken a high toll.” |
