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Subprime Mortgage Bond Sales Plunge in First Quarter (Update1)
By Darrell Hassler
April 2 (Bloomberg) -- Sales of bonds backed by subprime mortgages are tumbling as investors and bankers, concerned about rising delinquency rates, pull back from what had been one of Wall Street's fastest growing businesses.
About $79.3 billion of securities backed mainly by loans to people with poor credit or high amounts of debt were issued this year, down 37 percent from $125 billion in the same period last year, according to a March 30 Citigroup Inc. report.
Packaging mortgages into bonds was the fastest-growing part of the debt market since 1995. Lehman Brothers Holdings Inc., Countrywide Financial Corp. and Morgan Stanley were last year's three biggest issuers of securities backed by subprime mortgages and home-equity loans, according to Citigroup.
Subprime debt sales will go down a lot as lending standards get tighter,'' said Scott Simon, managing director and head of mortgage- and asset-backed securities at Newport Beach, California-based Pacific Investment Management Co., manager of the world's largest bond fund. </P>
<P>Fees from securitizing debts including mortgages, auto loans, aircraft leases and credit-card receivables almost tripled in the past five years to $5.6 billion, Bank of America Corp. analyst Michael Hecht estimated. </P>
<P>Underwriting Fees </P>
<P>The subprime portion of the business alone may have brought in $540 million of fee income last year, when Bear Stearns Cos. said about $540 billion of the bonds were issued. Underwriting fees for subprime mortgage securities last year were about 10 basis points, or 0.1 percent of the value of the bonds issued, according to Mark Adelson, head of structured-finance research at Nomura Securities Inc. in New York. </P>
<P>Sales this year may fall by as much as 40 percent, said Bill Martin, a portfolio manager of $35 billion in mortgage bonds at New York-based TIAA-CREF. </P>
<P>The share of subprime borrowers making late payments rose in the fourth quarter to 13.3 percent, the highest in four years, according to the Mortgage Bankers Association, a Washington-based trade group. At least 30 lenders halted operations, went bankrupt or sought buyers since the beginning of 2006. </P>
<P>Investors demand an extra 7.5 percentage points in yield over benchmark rates to hold five-year bonds rated BBB- and backed by floating-rate home loans that are mainly subprime, up from 3 percentage points three months ago, Wachovia Corp. found. </P>
<P>The spread compares with 0.1 percentage point for the AAA securities that have first claim on homeowners' payments, Wachovia said in a March 26 report. </P>
<P>Credit Enhancements </P>
<P>Standard & Poor's, which last week said subprime-mortgage bonds based on loans from 2006 may be theworst-performing in recent history,'' is demanding that issuers incorporate so- called credit enhancements. The protection can be obtained by requiring more cash reserves to guard against defaults, adding subordinated bonds that are the first to take losses or by including loan amounts greater than the face value of the bonds.
That means fixed-rate debt rated BBB and sold in the fourth quarter of last year on average won't have losses until 14 percent of value of the loans in the security default, up from 8 percent a year earlier and 6 percent in the fourth quarter of 2004, S&P said in a Feb. 28 report.
One of the biggest sources of demand for subprime securities has been collateralized debt obligations, which are backed by pools of bonds and asset-backed securities rather than individual loans.
Global sales of CDOs backed by securities of mainly subprime bonds more than doubled to $31.2 billion in the first two months of this year as issuers rushed deals while the subprime bond market collapsed, Morgan Stanley analyst Vishwanath Tirupattur said in a March 14 report. The new issues likely will fall off the rest of the year, he said.
Some CDOs may face severe'' ratings cuts because they hold subprime mortgage bonds, Moody's Investors Service said on March 27. Even top-rated bonds may have their ratings cut if the underlying collateral is downgraded, Moody's said. </P>
<P>Right now the CDO machine has essentially been put on hold,'' Martin of TIAA-CREF said.
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