Thursday, August 21, 2008

Subprime Mortgage Bonds Lead `Extinct' Credits, Moody's Says

(Bloomberg) -- Subprime mortgage-backed bonds lead credit products rendered ``extinct'' by the collapse of the U.S. housing market, according to Moody's Investors Service.

Collateralized debt obligations packaging loans and structured investment vehicles will also disappear as investors refuse to buy debt linked to U.S. housing market losses, Jennifer Elliott, Moody's group managing director in the Asia- Pacific, said today at conference in Melbourne.

``These are products that have just disappeared and we certainly don't expect to be coming back,'' Hong-Kong-based Elliott said. ``There is an overwhelming level of investor concern about what will happen in credit markets, as opposed to what has happened, that is impacting issuance.''

The worst U.S. housing slump since the Great Depression has triggered more than $504 billion of writedowns and losses at the world's biggest financial companies, many of which sold and invested in securities based on American mortgages. Subprime mortgage bonds made up almost half of the world's home loan debt securities prior to the housing collapse, Elliott said.

Structured investment vehicles, which operated by selling short-term debt to buy higher-yielding assets, have been forced to wind down or have defaulted after the seizure in credit markets cut their funding avenues. Investors are also avoiding CDOs, which package mortgage-backed bonds and use the income to pay investors.

``We have seen far more contagion of risk than anyone anticipated,'' she said.

RMBS Sales Plunge

Sales of bonds backed by U.S. commercial and residential loans have fallen about 90 percent this year from the same period in 2007, Elliott said. Derivative-based securities have also plunged 90 percent and high-risk, high-yield bonds sales have been cut by 70 percent.

``We are not seeing much happening at the moment and yes it is the height of the vacation season in U.S. and Europe, but I think it is deliberate nothing is being done,'' Elliott said. ``We haven't had any real bad news for a while and that makes me nervous for the beginning of September.''

Housing Wire comments:

Her remarks underscore an issue that’s received little attention this far; the idea that where credit markets are headed has as much to do with wiping out certain vehicles as does what’s already taken place over the course of the past year.

And, certainly, market conditions suggest neither CDO nor private-party RMBS issuance is likely to return soon. Thus far in August, there has been absolutely zero non-agency MBS issuance after just $700 million issued in July, according to trade publication Asset-Backed Alert; the non-agency MBS market essentially disappeared in October of last year.

The publication also reported that worldwide CDO issuance has all but dried up, as well: just 1.5 billion in CDO issuance has been recorded in August so far, compared to the $21.8 billion recorded one year ago. In July, just $6.1 billion in CDO issues were pushed out the door, compared to $14.7 billion in June and $35 billion one year earlier.

“We have seen far more contagion of risk than anyone anticipated,” Elliot said, according to the Bloomberg story. (You think?)

Factors pushing change
In particular, pending accounting changes regarding the off-balance sheet treatment of securitizations via two previously obscure (and equally obtuse) accounting standards known as FAS 140 and FIN 46R seem likely to reduce issuer enthusiasm and make it tougher, if not impossible, for issuers to manage large-scale securitization efforts.

Further, analysts have suggested that as much as $5 trillion would need to come back on the balance sheets of various financial institutions as a result of the proposed changes.

Treasury secretary Henry Paulson, as well as Fed chief Ben Bernanke and FDIC chairman Sheila Bair, have begun pushing covered bonds as an alternative to securitized trusts. The move to establish a covered bond market in the U.S. — until recently, a vibrant covered bond market existed in Europe — comes as regulators likely have reached to the same conclusion as Moody’s regarding the future of much of structured finance surrounding mortgages.

No comments: