Best of SFIG Vegas 2017
Securitization pros compared notes on regulatory compliance and learned about the risks and rewards of fintech; here are the highlights of the Structured Finance Industry Group;s annual confab.
Companies such as Sofi, Prosper, Marlette Funding and Avant are underwriting primarily on the basis of third-party FICO credit scores, rather than any proprietary scoring. And they draw consumers using the same direct-marketing techniques as traditional banks. “We think in many ways, they share more similarities than differences,” according to Tracy Wan, a senior director at Fitch Ratings.
The two will cooperate on research projects and educational programs. “The securitization process is an ideal candidate for the efficiencies of distributed ledger technology,” Perianne Boring, founder and president, Chamber of Digital Commerce, said in a joint press release..
The slow pace of new issuance is likely to compel investors to accept even smaller risk premiums on collateralized loan obligations.
Wynne Comer, a managing director at Bank of America, expects -A spreads on triple-A rated tranches reach as low as 100 basis points in the next few moonths from around 130 basis points currently.
"I think the thing that's held us back for so long is that a pretty small group of triple-A buyers were meaningful," she said. "We're definitely seeing that expand, and definitely seeing that grow internationally as well as domestically.
There’s a rising risk of denial of service attacks due to the widespread use of smart devices like thermostats, TVs and fridges, which are often built “with no thought to security,” according to former Department of Homeland Security Director Michael Chertoff.
Rules requiring “skin in the game” in securitizations caused a lot of hand-wringing in the commercial mortgage bond last year. Participants fretted that a requirement to hold 5% of the risk in deals would increase funding costs, causing them to lose market share to other kinds of lenders, such as commercial banks and insurance companies.
Turns out commercial mortgage bond investors are big fans.
Investors think that risk retention will encourage tighter underwriting of commercial mortgages, something they believe is sorely needed.
“Anything that aligns the interest with investors is better,” said James Grady, a managing director and head of structured finance at Deutsche Asset Management and a panelist at the Structured Finance Industry Group’s annual conference. “I’d like 10%, but I’ll take 5%.”
Are longer terms to blame for the rapid deterioration in the performance of subprime auto loans?
So says Peter Kaplan, a senior vice president and portfolio manager for Merganser Capital Management in Boston.
The industry has been puzzled by the fact that cumulative net losses have been rising since 2015, despite the fact that nearly every economic indicator suggests that borrowers should be having few difficulties meeting their obligations.
Kaplan thinks the problem may be that consumer confidence is fueling an overall rise in household debt. This, in turn, may be leading subprime lenders to use tactics such as longer terms to keep monthly payments low, rather than recognize consumers’ limited resources to service their debt obligations.
“Longer term loans are signaling that the consumer is under stress,” he said.
Securitization pros are guardedly optimistic about the Trump Administration’s impact on the industry, even if no one expects to see a rollback of regulations imposed by the Dodd-Frank Act in the immediate future.
The administration has come out quite aggressively with executive orders that echo the agenda of the Republican Party, such as scaling back the Consumer Financial Protection Bureau and the Volcker Rule, and altering the operations of the Federal Reserve.
Yet, “what exactly those priorities are and how they will order those priorities” remains in question, said Joshua Wilsusen, an executive director at Morgan Stanley.
And despite Treasury Secretary Steven Mnuchin’s focused on Fannie and Freddie, “how much political capital will put into financial reform is one of the wild cards out there,” he added.
Expect to see more bonds backed by Property Assessed Clean Energy Loans that earn top marks from credit rating agencies.
So far, a single deal, from Ygrene Energy Fund, has earned a triple-A rating, and only from a single rating agency, Morningstar Credit Ratings. Kroll Bond Rating Agency, by comparison, assigned an AA to the senior tranche of the deal, which was completed in 2016.
But Ygrene and two other PACE providers represented at the Structured Finance Industry Group’s annual conference in Las Vegas are hopeful that others will follow suit.
Lain Gutierrez, a senior vice president at DBRS, was encouraging. “We’ve seen the performance levels, and they are very stellar performers,” he said.
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