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Home Lenders Feed Swelling Conduit Market
Asset Backed Alert, Harrison Scott Publications Inc. (March 18, 2005)
Issuance of asset-backed commercial paper is sure to keep booming over the next four or five months, thanks to mortgage lenders' unquenchable thirst for conduit funding.
The volume of outstanding conduit paper ballooned to a record $774 billion last week, from $749 billion at the beginning of the year, according to the Federal Reserve Board. The growth is likely to create a buzz among the 275-plus attendees at a commercial-paper conference that Strategic Research Institute is hosting in New York next week, since many market players thought issuance would increase at a slower pace after exploding at yearend 2004.
Much of the new volume is still coming from mortgage and home-equity lenders who are shoveling loads of credits into their own conduits, including such industry giants as Ameriquest Mortgage, Cendant, Centex, Countrywide Home Loans and GMAC's Residential Funding Corp.
Some of those lenders, as well as their competitors, are also funneling their credits into other companies' multi-seller conduits. But in large part, "it is the single-seller mortgage conduits that are contributing to the rapid growth," one investor said.
Why the intense interest? Responding to predictions that rising interest rates will eventually quell demand for new home loans, lenders are trying to generate business at a breakneck pace. Those that run their own conduits are using the entities to create funding capacity in addition to the warehouse lines and repurchase agreements they receive from banks, multi-seller vehicles and finance companies.
"Our pipeline is full with new mortgage-warehouse vehicles from smaller issuers," said Everett Rutan, a senior vice president at Moody's. The plans call for $8 billion of funding capacity via four new single-seller conduits and two existing vehicles that unidentified lenders want to expand.
In the meantime, sponsors of multi-seller conduits are trying to win back business by lowering their prices. Some are now charging 21-24 bp over their issuing costs to securitize receivables with single-A to double-A ratings. That's at least 10 bp lower than a year ago.
BSN Capital Partners has also attracted attention lately, since its six-month-old Chesham Finance conduit is already bumping up against its $20 billion issuance ceiling. The London firm's second conduit, a similar vehicle called Ebury Finance, is slated to start issuing by the end of this month.
BSN's conduits avoid the costs of traditional credit enhancement and liquidity backstops by entering repurchase or securities-lending agreements with top-rated counterparties. Some rivals have grumbled that Moody's and S&P initially let Chesham get away with transactions it shouldn't have been allowed to conduct. A source familiar with BSN's conduits dismissed the snipes, however, referring to them as a "dead issue."