SCI Bulletin: housing prices to reach bottom?

News
• The market has woken up to the inevitability of principal forgiveness as the way forward in finding a bottom for housing prices, according to structured finance analysts at JPMorgan. "In our view, the sooner the outstanding debt levels are re-aligned with the value of the core underlying asset, housing, the sooner home prices can stabilise and economic growth can return to sustainable levels," they note. "To help smooth the process, the government seems likely to provide some form of mortgage insurance to debt once a lender has provided at least partial principal forgiveness or forbearance to the borrower. For MBS investors, two realities are emerging. Bond cashflows will be altered in a meaningful way; and moral hazard and legal risks are escalating."
• DTCC will begin publishing aggregate market data from its Trade Information Warehouse tomorrow, 4 November, and continuing weekly. It will post on its website the outstanding gross and net notional values of CDS contracts registered in the Warehouse for the top 1,000 underlying single name reference entities and all indices, as well as certain aggregates of this data on a gross notional basis only. The data is intended to address market concerns about transparency, the clearer says.
• Four industry-wide CDS portfolio compression runs were completed in North America and Europe last week, report Creditex and Markit. Compression runs were completed in North America for CDS contracts referencing consumer products companies and in Europe for CDS contracts referencing industrial, energy and utilities companies as well as European sovereigns. Compressions carried out across a total of 61 reference entities achieved a gross notional reduction of 44%, or US$150bn, across all participating counterparties.
• TriOptima's portfolio compression service, triReduce, reports that it contributed US$24.5trn of the US$25trn in CDS notional principal reductions reported by ISDA last week. TriOptima has offered 39 compression cycles since the beginning of the year and will offer nine additional compression cycles in November and December, as the industry focuses its efforts on reducing notional principal outstandings.
• ISDA - together with the Operations Management Group, the Managed Funds Association and SIFMA - has submitted a letter to Timothy Geithner, president of the New York Fed, in an effort to improve derivative market processing and scalability, as well as augmenting risk mitigation and transparency. The ISDA initiatives outlined in the letter include: CDS auction hardwiring; conferences in New York, London, Sydney, Tokyo and Hong Kong to promote awareness of industry commitments in respect of operations matters; and the release of various best practices and guidance notes, relating to individual asset classes and collateral matters.

Deals
• Moody's has assigned Aa3 ratings to two credit-linked schuldscheine issued by LBBW and due in 2015. Though the issuance size is very small - at €2m and €14m - the deals represent an interesting new twist on the use of schuldscheine in securitisations (see SCI issue 97). According to Moody's, the transactions are synthetic CDOs referencing corporate and sovereign entities, comprising 2.5% thick tranches with 4% subordination. Substitutions of the underlying portfolios may be made by LBBW, but require consent of the creditors. The deals allow trading gains or losses to adjust the subordination.

Rating agency actions
• S&P has released a transaction update on Athilon Capital Corp/Athilon Asset Acceptance Corp and has placed the CDPC's issuer credit rating on credit watch negative. The rating action is based on S&P's stressed scenarios analysis on the company's exposure to certain ABS assets. However, the rating action will not cause Athilon to post collateral to the counterparties because its operating guidelines don't permit it to enter into swaps that require it to post collateral.
• S&P has withdrawn its AAA/A1+ counterparty credit rating on 47 Quay and the preliminary ratings on the senior/junior mezzanine floating-rate (AAA/AA) and senior/junior capital notes (A/NR) issued by the CDPC. The action follows 47 Quay Capital's withdrawal of its CDPC vehicle and issuer transactions.

Research
• A new report from Wachovia Capital Markets highlights that the credit crunch is the first serious test of the ABS market. Securitisation of consumer assets was still in its infancy during the last credit crunch of 1990-1991 and the rapid growth of securitisation as a financing tool was in part a response to that contraction of credit. "As households work to repair their own balance sheets, consumers and mortgage debt outstanding is likely to fall. This should translate into a smaller ABS market in 2009, but an increase in 2010," structured finance analysts at the bank note.
• The credit deterioration of counterparties and the current global credit and liquidity crisis have heightened the risks associated with variable rate bonds issued by housing finance agencies (HFAs), says Moody's in a new report. The proceeds of HFAs bonds are used to finance mortgage loans for low- and moderate-income borrowers. "In some cases, disruption in the short-term debt markets has resulted in an inability to remarket variable-rate demand bonds, exposing some programmes to higher interest rates and possible acceleration of principal repayments," says Moody's analyst Omar Ouzidane, author of the report.
• Fitch reports that China's securitisation market is moving forward gradually, despite the complex domestic environment and the current global financial crisis. Although regulators have made efforts to advance the market's development, and steady progress of the second batch of pilot programmes is noticeable, corporate ABS - which is thought to have the most potential in the country - is missing from the picture. The low liquidity of securitisation notes in the interbank market, mainly as a result of investment restrictions by regulators, is another concern for market development. However, the agency expects an additional securitisation transaction to be issued in 2008, and another round of formal reviews on the market by regulators to follow.