S&P: Regulatory Issues May Temper U.S. Structured Finance Recovery Wednesday, June 30, 2010
Lingering economic and regulatory uncertainties are keeping a lid on U.S. structured finance issuance, according to a new report published by Standard & Poor's Ratings Services.
And high unemployment continues to adversely affect incomes and, consequently, the performance of collateral underlying U.S. structured finance transactions.
In the report S&P said it believes the liquidity situation will likely continue to improve and new issuance may continue to come from the non-mortgage consumer asset-backed securities (ABS) sector, especially auto loan ABS, as in the first half of 2010. New structured finance transactions have come to market with tighter underwriting guidelines and less leverage than before the downturn.
The positive momentum that began in 2009 should continue in the second half of 2010. Tightening credit spreads and stabilizing collateral performance for the structured finance assets, with the exception of commercial mortgages and private student loans, along with growing interest in issuance across most structured sectors are good indicators of this continuation, the ratings agency added.
However, new or proposed regulations have affected the securitization market because of various restrictions on sponsors of structured transactions, including higher capital requirements and proposed risk retention requirements, as well as a greater amount of required disclosures.
"A fragile economy, combined with potential regulatory overhang and changes, hasn't necessarily been helpful for the structured market's positive momentum," S&P said. "While some economic indicators are positive, especially three consecutive quarters of GDP growth, the economy has been slow to recover. That's partly because consumers are in no position financially to lead this rebound, as they were in the previous two recoveries. The structured market recovery is also lagging the overall economic recovery, as expected. Furthermore, the amount of distressed 'shadow' housing inventory continues to pose risks not only in the mortgage space but for the entire consumer sector, although the U.S. housing market is showing signs of stabilization."
The improved liquidity for structured securities has come mainly from federal government programs. These include the Term Asset-Backed Securities Loan Facility (TALF), the Federal Reserve's mortgage securities purchase program, and tax credits for homebuyers, which significantly contributed to increased liquidity and a tightening of credit spreads for structured sectors. This has effectively lowered funding costs and replenished liquidity in the capital markets. Most of these programs ended in the first half of 2010 as the U.S. government slowly dialed back its intervention in the capital markets.
S&P expects the following for the key structured finance sectors during the second half of 2010:
The volume of new U.S. residential mortgage-backed securities (RMBS) issuance has remained low for several years now, and S&P expects it to stay low through at least the end of 2010.
Market interest in U.S. auto loan ABS appears to be intact even without the TALF program, including renewed interest in both subprime auto transactions and subordinate bonds. U.S. auto loan collateral continues to benefit from improved credit performance due to the tighter underwriting standards that auto finance companies have implemented since 2008.
S&P's outlook on the U.S. auto lease ABS market remains stable to positive for the remainder of 2010. Collateral performance has stayed relatively strong, with credit and residual losses generally in line with or better than our initial expectations. This mainly reflects an improving economy and the strongest used-vehicle values we've seen in recent years.
U.S. banks' overfunded position and the uncertain effects of regulatory and accounting changes have squeezed credit card ABS issuance to levels we haven't observed since the 1990s. "We've seen an overall improvement in the performance of most credit card ABS collateral, however; as a result, we think our ratings on credit card ABS should remain relatively stable for the remainder of 2010," S&P said.
Although the Federal Family Education Loan Program (FFELP) is ending on July 1, our outlook remains stable on FFELP ABS for the remainder of 2010 due to the federal reinsurance of at least 97% on this collateral. At the same time, high unemployment continues to weaken the performance of private student loan collateral, as recent graduates are struggling to find jobs. Therefore, S&P's outlook on private student loan ABS continues to be negative.
"High unemployment will continue to put pressure on commercial real estate fundamentals. As a result, we believe vacancies will continue to increase in many markets for the remainder of 2010. This is likely to keep rents down for the foreseeable future, which, in our view, will result in rising loan delinquencies. New commercial mortgage-backed securities (CMBS) issuance is likely to remain subdued until fundamentals and loan delinquencies stabilize.
We expect asset-backed commercial paper (ABCP) outstandings to remain relatively flat to slightly down for the remainder of 2010. ABCP sponsors will probably continue the trend that began in early 2010 of cautiously increasing new transaction activity, mostly to replace existing and/or amortizing transactions. Nevertheless, the U.S. ABCP market remains stable in an environment where participants continue to grapple with changes in the U.S. regulatory landscape and lower demand for credit."
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