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asset-backed alert

Banks Eye Revival of Home-Loan Conduits
Asset-Backed Alert (July 30, 2010)
Several Wall Street banks are thinking about setting up units that would routinely take on mortgages from smaller financial institutions, with the intent of securitizing the credits down the line.

The resulting operations, known as mortgage conduits, used to be among the largest sources of home-loan securitizations. But they essentially vanished with the onset of the global credit crisis - and subsequent attempts at their resurrection were met with failure.

Now Cantor Fitzgerald is among those considering the creation of such businesses, marking its first foray into the sector. So are Goldman Sachs and RBS. And Credit Suisse may bring back its DLJ Mortgage Capital operation, which was mothballed amid the market downturn.

Details of the plans remain murky. Generally speaking, they would take cues from previously active conduit businesses like Lehman Brothers' Aurora Loan Services - considered a standard-bearer in the industry's heyday. One key difference: The new versions would focus on prime-quality jumbo loans, rather than the subprime credits that fueled, and eventually sank, Aurora and others.

They also would be constructed to adhere to heightened disclosure requirements set forth under proposed revisions to the SEC's Regulation AB, and might come equipped to retain portions of their deals if such steps are ultimately deemed necessary under various financial reforms - including the changes to Reg AB and the Dodd-Frank Wall Street Reform and Consumer Protection Act. That said, whether the efforts move forward at all could well depend on the outcome of the government's actions.

"I see these as the third generation of the mortgage conduit. Lehman's Aurora is the first, and then came the Bear Stearns and Morgan Stanley second-generation versions. Now this is what's coming," one market player said of the vehicles in development.

Each of the units would set up financing arrangements with outside mortgage originators, agreeing to take on loans tailored to a list of specifications - with securitization as an eventual exit strategy. Some banks could also work with affiliates. RBS, for example, might stock its conduit with credits from its Citizens Bank division.

Whole-loan purchases might be on the menu as well.

The word on Goldman is that the bank might direct its effort through its Litton Loan Servicing arm, which currently focuses on loan collections. The bank bought Litton from the now-defunct C-Bass in 2007.

A buzz emerged a few months ago that a similar comeback was afoot in the conduit business. But still-sour market conditions put those efforts on hold. Now, the banks are encouraged by a recent increase in investor demand for the types of bonds they eventually would issue. Indeed, secondary-market traders say buyers have outnumbered sellers in recent weeks. "Whatever is being put out there is getting gobbled up. Demand is ferocious," one trader said.

Another factor: There's a belief that once Congress gets around to revamping Fannie Mae and Freddie Mac, it will reduce their maximum loan-purchase sizes from the current $729,750. That would reclassify a large swath of would-be agency loans as jumbo credits, creating a need for private-sector funding.




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