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Insurers Raking In Subprime-MBS Mandates
Asset Backed Alert, Harrison Scott Publications Inc. (April 6, 2007)
Bond insurance is coming back into vogue for subprime-mortgage bonds, making monoline guarantors some of the few to benefit from the sector's recent troubles.
Market players say they expect to see a big increase in the number of issuers who purchase triple-A-rated wraps for home-loan securitizations in the months ahead, as those shops work to lure investors who have been turned off by rising defaults and delinquencies among the underlying credits. There's also talk that the fees lenders pay for such protection will rise, reflecting the greater risk attached to subprime collateral.
The trend has already taken hold to an extent. Issuers of subprime-mortgage and home-equity loan securities bought bond insurance for 23 deals totaling $15.6 billion during the first three months of this year, up from 17 transactions for $11.5 billion a year ago, according to Asset-Backed Alert's ABS Database.
MBIA claimed the largest chunk of the assignments, applying its guarantee to eight subprime-mortgage and home-equity offerings, up from none a year earlier.
Results were mixed elsewhere. Ambac, for example, covered three such issues, down from four a year ago. FSA's stamp was on four deals, compared to none in the first quarter of 2006. And FGIC saw its tally dip to just two, from eight.
XL Capital and Assured Guaranty also saw increases in their subprime-mortgage business, while CIFG's count fell. Overall, 15% of new subprime-mortgage and home-equity deals have been wrapped this year, up from 8% in the first quarter of 2006.
Among issuers, Countrywide Home Loans was the biggest purchaser of bond insurance for its subprime-mortgage and home-equity securitizations during the first quarter, at $4.5 billion. That would seem to knock down speculation that only smaller lenders would opt to wrap their offerings if trouble arose.
Regardless of where the business is coming from, it's certainly welcome by the insurers. After viewing bond insurance as a virtual necessity a few years back, many subprime-mortgage lenders barely acknowledged it as an option for their more recent securitizations, as they chose lower-cost senior-subordinate issues instead.
Senior-subordinate offerings cost a bit more to conduct these days, as investors gravitate to products with outside credit enhancement. In fact, a buysider at one money-management shop said he's under orders not even to look at subprime-mortgage bonds unless they carry triple-A-rated guarantees.
The upshot for companies offering those policies is that their overall volume of asset- and mortgage-backed bond coverage has risen to a combined to $22.1 billion so far this year, from $17.9 billion a year ago. MBIA is the leader, on the strength of its mortgage-related assignments. The insurers' totals were also buoyed by increased deal flow from auto lenders, who insured $4.7 billion of offerings.
It's likely to take several more months before a clear picture emerges of what bond insurers can charge to wrap mortgage-related offerings. However, there's talk that the subprime-lending industry's woes could enable guarantors to roll back to 2002 rates - when annual premiums were around 20 bp of the face value of each deal.
Those fees have been nearly cut in half since then.