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Regulatory Deadline Drives December Frenzy
Asset Backed Alert, Harrison Scott Publications Inc. (November 18, 2005)

The new-issue pipeline is brimming with late-year deals.

Propelled largely by an expected onslaught of mortgage-related offerings, the U.S. asset- and mortgage-backed markets could produce some $100 billion of deals next month - easily eclipsing the $89.9 billion of offerings that priced in December 2004.

Part of the reason: Companies that write prime-quality mortgages, subprime home loans and home-equity credits want to take advantage of any remaining capacity in their SEC-registered shelf entities before a new set of SEC disclosure rules kick in on Jan. 1. By stockpiling funding under current rules now, those issuers can buy some extra time before they have to comply with Regulation AB, which requires servicers to provide investors with more extensive information about securitized loans.

"A lot of those shops don't have their loan pools ready," so issuing before yearend gives them another month or two of breathing room, one investment banker said.

Of course, continued refinancings and home purchases would keep mortgage-securitization volume heavy even without Regulation AB - as it has been for some time. Typical yearend activity would also contribute to the deluge.

But those following volume trends say the pending regulatory reforms will be what makes the difference between a busy month and an all-out issuance bender. "December is going to be a madhouse. Everyone's going to be out there," one investor said.

Virtually every major issuer of mortgage-related bonds is expected to be in the market in December, including Countrywide Home Loans, GMAC's Residential Funding Corp., IndyMac and just about any investment bank that runs a shelf entity.

The expected rush of deals, combined with a recent barrage of offerings, means supply is likely to exceed investor demand at some point - forcing spreads on top-rated bonds to widen by 5-10 bp. The imbalance would have an even greater impact on subordinate issues, whose returns have been fluctuating anyway.

Just this week, spreads on subordinate home-equity loan bonds widened by as much as 50 bp. Ameriquest Mortgage, for example, wound up pricing a batch of triple-B-minus bonds at 750 bp over Libor on Wednesday. Bookrunners Barclays Capital and J.P. Morgan Chase had been looking for less than 700 bp.

Investors also demanded sweeter returns on similar issues backed by loans from Bear Stearns, Lehman Brothers, Long Beach Mortgage and Opteum Financial.



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