Nonconforming Securitizations: Is it a Comeback?


The development of nontraditional markets is undoubtedly changing the mortgage banking industry. From subprime, to high loan-to-value, to home equity deals, mortgage banking firms are challenged by numerous new obstacles as they move into subprime and nonconforming business segments.

Though the high risk involved with such transactions continued to scare off investors for most of this year, two deals that priced last week - GMAC-RFC's high LTV transaction (see related article below) and GE Capital Mortgage Corp.'s $418 million home-equity offering - may foreshadow a trend back toward greater interest in atypical mortgage product.

"High LTV is back," said one veteran MBS trader last week. "And GE, a battered home-equity player, is back as well."

Indeed, the "day-of" pricing of the GMAC deal last week has been characterized as a virtual "blowout" by several market sources. And the surprising investor attraction to GE's deal - only months after previous HEL deals from the company struggled to stay afloat - brought many surprised reactions from market players.

The GE senior-subordinated offering, lead-managed by Prudential Securities, was heard priced Thursday at or tighter than launch levels, sources say. The largest senior tranche, totaling $140 million with an average life of 0.89 year, was valued at 45 basis points above synthetic LIBOR, same as its launch level.

"This deal seems to be going very well," said an MBS portfolio manager. "GE has gone from the best player to the worst player and back to the best player in six months' time."

Moody's Investors Service dealt GE a painful blow when it downgraded several prior GE home-equity deals for losses in 1996, 1997 and 1998. The rating agency also put the company on a watch list and forced it to increase its subordination levels, which gave it enough headline risk to scare off investors.

"The first two GE HEL deals this year were very difficult sales," said Michael Hoeh, head portfolio manager at Dreyfus Corp. "A senior-subordinated sale for $500 million in bonds in March had a terrible time.

"I guess there is a lot of money to be put to work, and people view GE as a major name, so they are jumping for this current deal," he added.

Last week, high LTV did even better than the GE deal. Some players were surprised that the GMAC high LTV deal sold so quickly, and that a 10-basis-point to 15-basis-point concession to lure investors so easily.

"It priced cheaper than a B&C deal, which shows how short memory is in this market," Hoeh said. "That stuff was trading hundreds of basis points behind a couple of months ago. And now to be on top of a normal home-equity deal is pretty remarkable."

Part of the reason for the wider interest in other types of mortgage loan products recently is the government sponsored enterprises' redefinition of what they consider a "conforming" mortgage to be, says analysts at Moody's.

"The GSEs are taking a fresh look at their criteria for eligible, investment-quality mortgages to reflect their greater comfort with the risk profiles of some loans that have historically been rejected," said Stanislaus Rouyer, a Moody's researcher. "The expected entry of the GSEs in the alternative-A and A-minus loan market should dramatically increase their market coverage, helping them grow their revenues and better serve the housing needs they are mandated to serve."

Though their entry into these markets should bring greater efficiency and better pricing to borrowers, Rouyer pointed out that those most likely to be negatively affected are the subprime mortgage lenders that could lose their better loans to the GSEs.