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Subprime-Loan Woes Dry Up Issuance . . .
Asset Backed Alert, Harrison Scott Publications Inc. (March 2, 2007)

A projected slowdown in the volume of asset- and mortgage-backed securities coming to market is proving far more abrupt than initially thought.

Most securitization professionals expected the volume of new issues to level off, or possibly decline slightly, due to mounting troubles in the home-loan business this year. But most didn't figure that just $160 billion of deals would have priced overall in the U.S. in January and February - down $55 billion, or 26%, from a year ago, according to Asset-Backed Alert's ABS Database.

A slide in home-equity loan and subprime-mortgage issues is the main culprit, with just over $40 billion of such transactions booked so far in 2007. By this time last year, more than $85 billion of the bonds had priced.

Take Washington Mutual, for example. Although the lending giant remains the most active issuer of securitized products in the U.S., its mortgage-related output has dropped considerably. In fact, it sold a mere $1.6 billion of subprime-mortgage and home-equity loan bonds over the first two months of this year, compared to $11.2 billion a year earlier.

The decrease caused WaMu to tumble from the top spot among in those asset classes to 13th place, even as it remained an active seller of prime-mortgage bonds. GMAC fell from second place to seventh in the same category, where its output dipped to $2.3 billion, from $7.4 billion.

"Everyone's cutting back. All the lenders are slowing down," one investor said, noting that on the buyside, even stalwart Freddie Mac has slowed its purchases of subprime-mortgage bonds.

The asset class had been one of the most active in the securitization business as the volume of U.S. asset- and mortgage-backed issues erupted over the last three years, to over $900 billion in 2006. That began to shift last year, when the production of such deals started to taper off. But the slowdown wasn't nearly as severe at the time.

The more recent effects of the reduced deal flow are fairly far reaching. In Europe, where issuance volume continues to climb, market players are starting to worry about whether the same fate awaits the U.K.

And executive recruiters in the States said they recently started receiving a lot more resumes from individuals who work on mortgage-related deals. While most of the top investment banks say they are still hiring mid-level staff, "it looks like some people don't think they'll have any work to do," one headhunter said.

The flow of new securitizations will likely pick up a bit this month, since most companies that write or buy home loans like to securitize by the end of each quarter. That probably won't last though, as many subprime lenders - or at least those still standing after a recent spike in borrower defaults - can no longer keep up with asset-backed investors' demands for higher returns, better credit protections and tougher loan-underwriting standards.

Those obstacles have narrowed the pool of eligible borrowers and forced many subprime lenders to scale back their activities over the last few months. Many have also been bought by banks with deep pockets or put themselves up for sale. Others, including Ownit Mortgage, simply collapsed under the weight of a recent trend that has seen more borrowers default on their loans almost immediately.



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