Weathering the Liquidity Storm, HEL to Bounce Back in 2000; Financially Strong Players At Forefront of Battered Market


With last year showing a decrease in volume issuance, mirroring levels seen in 1997, market participants can only ponder what 2000 will bring for home-equity asset-backed securities.

Issuers dealing with the liquidity crisis of 1998 resulted in a volume decrease of 21% in 1999. The negative effects of the crisis caused issuers that once had a strong role in the home-equity market to reduce issuance for 1999 or to not issue at all. Those with the greatest financial strength picked up the slack, filling much of the void, market sources say.

"Some of the players that were important participants in prior years had less focus on volume because they were dealing with some of the issues such as the liquidity crisis as well as financial problems. They tended to access the whole-loan market more than the securitization market in order to generate some cash," said Henry Engelken, an analyst at Moody's Investors Service.

"Specifically in the home-equity market there was about $67 billion. That's just slightly ahead of the $66 billion in 1997 so it was very close," added Engelken.

Although this decrease in volume occurred, there was a very different mix of products and players in 1999. Securities backed by loans from financially weak lenders priced very differently than the loans backed by financially strong lenders. This price tiering, continuing the trend begun in 1998, could be seen at every rating level, including senior securities in insured transactions. The price tiering was a result of investors becoming increasingly wary of the risk of a servicing transfer, and the negative effects such a transfer could have on pool performance.

Residential Funding Corp. became the issuer with the most securitization volume in 1999, while past top issuers such as ContiMortgage, IMC Mortgage and Amresco Mortgage, took a back seat.

"We've seen that the investors in ABS paper have started to tier issuers by financial strength because of concerns about things like servicing disruptions," said David Teicher, vice president and senior credit officer at Moody's.

The largest decrease seen in dollar amounts came from subprime closed-end deals. But the performance of high loan-to-value transactions remained weak throughout the year, with issuance down about 45%.

But all was not bad in 1999. The credit quality of new securitized loan pools remained stable generally, with notations of positive trends in documentation and loan-to-value ratios. There were also isolated occurrences of weaker credit quality due to adverse selection as a result of increased whole-loan activity.

HEL in 2000

According to a report issued by Moody's, the market in 2000 is expected to be dominated by issuers who are financially strong, such as RFC, GreenTree (Conseco) and Countrywide Credit Industries, increasing the total issuance to approximately $75 billion.

"Those are the issuers that have the most financial strength. They're the ones that will be coming to the market," explained Engelken. "I think what happened in the 1998 liquidity crisis sort of shook out some of the weaker issuers and the ones that are remaining are some of the ones that are perceived to be stronger. They are going to be the ones that we think are most likely to come to the market."

"In terms of the way the companies operated their liquidity needs and their ability to get good pricing in the market for their securities is going to depend on their financial strength," added Teicher.

The demand for subprime loans and credit quality of new polls should most likely remain stable, while securitization of loans purchased in the whole loan market may create greater variability in loan quality due to adverse selection.

"We think the securitization market will rebound in 2000," Engelken. "We put an estimate of $75 billion in the report, which is about an 11% increase over the 1999. We think that it's a good market and the investors like the products and that there will be a demand for the products this year. We think that's its going to grow."