Vanguard's Behal Warns Of Obsolescence For Asset-Backed Bonds
http://online.wsj.com/article/BT-CO-20111017-710631.html
17 October 2011
Dow Jones Newswires
Al Yoon
MIAMI (Dow Jones)--Investors avoiding asset-backed securities may be pushing those bonds into a self-fulfilling prophecy of obsolescence, an ominous outlook for a market that has been key for consumer lending for decades, a top mutual-fund manager and other bond experts said Monday.
The ABS markets--which fund loans for autos, student loans, home and commercial mortgages--have been some of the most volatile since the financial crisis as investors exact a new toll on the risks that became apparent during the lending bubbles of the mid-2000s. Some backed by short-term loans, such as autos, have fully recovered but larger real estate-related asset-backed securities have lagged behind in fits and starts.
Many investors, especially those with smaller portfolios and fewer resources for research and trading, are simply avoiding the sectors altogether, said some investors and analysts gathered at the Information Management Network's ABS East conference in Miami. It was a disturbing vision to panelists who agreed that securitization was a crucial supplement to bank lending if consumer credit is to provide a boost to the U.S. economy.
"You're running into a problem where there's not the depth of investors," said Bob Behal, co-head of consumer asset and commercial mortgage-backed securities at mutual-fund complex Vanguard Group Inc., which manages $1.6 trillion in assets. "There's going to be an obsolescence risk in the future."
Overall, companies have issued about $200 billion of asset-backed securities so far this year, down almost 90% from the peak in 2007, said Howard Esaki, head of research at ratings company Standard & Poor's, a unit of McGraw-Hill Cos. (MHP).
Part of the reason for the decline is the lack of consumer demand for loans in the aftermath of the financial crisis and recession. But there is also a lack of investor demand, which, for the fewer active players, can be frustrating, Behal said.
"We struggle with that," he said, noting that Vanguard sees "value" in some of the asset classes.
Commercial mortgage-backed securities is one area where investors and analysts in recent weeks have recommended purchases to take advantage of recent increases in risk premiums. But the response has been tepid as investors remain wary about the impact of global economy, leaving risk premiums flat to higher despite a recovery in other risky markets, including equities.
Because of volatility in commercial-mortgage securities, lenders have pulled back on real-estate loans that have been key to a modest recovery in commercial property.
"We're not talking about housing being up or down, we're talking about 'is our country going to default?'," said Adam Siegel, co-head of asset- and mortgage-backed trading at RBS Securities, a unit of Royal Bank of Scotland Group PLC (RBS, RBS.LN).
Sean Dobson, chief executive officer of mortgage specialist Amherst Holdings LLC, said the market remains hindered by a lack of responsibility in the structured-finance markets for the "mess" that was made ahead of the financial crisis. Items such as transparency behind the risk in residential mortgage securities must be improved, he said.
Panelists suggested that it was the industry's responsibility to do a better job of educating the investor base of risks. This can be better done once the industry addresses its problems, such as the perception surrounding the credit-rating companies paid to grade the assets, Dobson said.
"It's quite a task to get someone comfortable with something that was AAA rated and now trades at 30" cents on the dollar, he said. |
