Worst Ahead For US Sub-Prime Mess, ABS East Panel Says

Source : The Business Times, November 6, 2007

Florida - More pain ahead was the theme for this year's ABS East conference where panelists warned that the worst is yet to come for US sub-prime mortgages and those securities tied to it.

With sub-prime losses mounting into the billions of dollars, downgrades intensifying in sub-prime residential mortgage-backed securities, and more recently, the collateralized debt obligation, or CDO, market, 2008's performance looks pretty bleak.

In an opening panel discussion on the state of the structured finance market, investors and issuers agreed that falling home prices, rising defaults and foreclosures along with tighter credit left the US housing market in a tailspin this year. But fallout in the future remained a key concern.

Panelists were all over the place when quizzed on what volume would be like for ABS in the coming year. Answers ranged from down 80 per cent to up 10 per cent in 2008.

Conference participants agreed there would be some impact from sub-prime mortgage contagion to other segments of the asset-backed securities market, including credit cards, autos and student loans, but most believed it would be moderate. The conference, which officially opened on Sunday, runs through Wednesday.

Spreads in the sector were seen flat to wider in the coming year, but all agreed things would get worse before they got better.

Steve Eisman, managing director of FrontPoint Partners, warned conference attendees that the under-equitised structured finance market was in need of a complete overhaul.

Many agreed that transparency issues would be key in the structured finance market in the coming year and would need to be addressed, specifically when it came to the market for ABCP, or asset-backed commercial paper.

Panelists agreed that the market was in dire need of an overhaul and predicted certain segments of ABCP, without external liquidity support like extendible notes, would disappear. Other portions like the multiseller programs, which could be restructured, would survive.

Independently sponsored commercial paper vehicles, extendibles and SIVs, will never return in the form that they were in, in some cases,' said Erik Falk, managing director and cohead of global securitized products at Deutsche Bank.

At the conclusion of the discussion, the moderator asked panelists what would make the ABS market feel normal again - to which participants responded, an entire restructuring of the structured finance market. -- REUTERS