Contents

CMBS

Special strategies

Special servicer resolutions weighing on CMBS valuations

Resolution strategies vary widely among US special servicers. Consequently, considering which special servicers are more likely to modify loans is growing in importance when valuing a CMBS bond.

US special servicers resolved over US$27bn of conduit CMBS loans last year, up from US$6bn in 2009, according to CMBS analysts at RBS. Of the 2010 amount, US$16bn was returned to the master servicer, while US$11bn was liquidated.

Barclays Capital estimates that LNR Partners had the highest share of conduit liquidations in 2H10, accounting for almost 50%. CWCapital Asset Management had the second highest share, at about 23%, with Berkadia Commercial Mortgage, C-III Asset Management and Midland Loan Services accounting for 5%-10% each.

Note sales appeared to be more popular with CWCapital and LNR last year, while C-III was less active in this disposition technique. However, CMBS analysts at BarCap note that this might change, as C-III's name has begun showing up more in auction documents.

The RBS analysts suggest that special servicers are more likely to pursue a modification strategy on larger loans. For instance, approximately 75% of all loans modified are larger than US$50m, while 51% are greater than US$100m.

Two loan modification scenarios are gaining particular traction - extensions and A/B structures. Loan extensions are more common at present.

For example, during February alone 25 loans worth US$547m were modified, consisting of maturity extensions (21%), interest rate reductions (28%) or a combination of the two (51%). At US$186.5m, the Four Seasons Aviara Resort in Carlsbad, CA - securitised in WBCMT 2007-C30 - was the largest loan to be modified. In this instance, CWCapital lowered the coupon to 2% and granted a five-year extension with interest-only payments.

"[Loan extensions] are beginning to make sense now, with the low interest rate environment. Many expect the commercial real estate market to continue recovering; while I'm less bullish about its prospects, at least transactions that have been modified won't take any losses in the meantime," explains Brock Andrus, managing partner at 1st Service Solutions.

Equally, the A/B structure makes sense in certain situations because it allows the lender and borrower to put new money at risk at proper leverage ratios, with the lender reaping any upside from the B-note. Andrus suggests that this is the best approach for underwater assets with long maturities, as it stabilises the deal and preserves value. While the number of A/B restructurings is slowly growing, some special servicers remain unwilling to take that route, however.

Meanwhile, REO dispositions accounted for more than US$2bn last year, which the BarCap analysts indicate is high by historical standards. They suggest this is because servicers are finally able to find buyers for some of the severely distressed properties that were almost impossible to sell even nine months ago. But the overall increase in actual transactions in commercial real estate has also given servicers more comfort in establishing value.

"As more properties are sold, there are more benchmarks to prove the market value of the underlying real estate, making it easier for a servicer to make a workout decision. This is especially important when many of the properties in special servicing have highly distressed NOI that cannot be used as a basis for traditional valuation using cap rate, and another metric - for example, valuation per square-foot or per unit - might be required," the BarCap analysts note.

Andrus agrees that visibility around values and special servicer strategies has increased as the number of resolutions has risen. "There are enough trades with which to compare values," he says. "At first, it was hard to find comparables, but now there is more certainty around pricing. This, in turn, provides special servicers with more opportunities to make deals and generally they appear to be more willing to do so."

Visibility around loss severities for loans in special servicing is also emerging. If a loan is resolved via REO, liquidation or note sale, the loss severity is 60%-65%; if it is resolved via a discounted pay-off (DPO), the loss severity stands at 50%-55%.

Andrus says that this makes sense, given that a deal made with the borrower should achieve better pricing than a fire sale. "Borrowers don't want to lose the asset and have intimate knowledge of it, so they can often see more potential in it than someone undertaking a fire sale. Borrowers want to keep their reputation intact, so if they have money with which to execute, they'll often pay more."

Special servicer strategies are generally influenced by whether the asset is based in a judicial state. Andrus indicates that specials are more likely to negotiate a deal with a borrower in a judicial state and foreclose on a property in a non-judicial state.

However, they also tend to 'dual-track' resolutions by negotiating with the borrower and pursuing a foreclosure at the same time, which serves to put additional pressure on the borrower. In addition, liquidation timelines are fairly state-dependent.

But differences in loss severities between servicers remain small, with average loss severities for the top-five specials ranging from 50% to 60%. Likewise, the time between default and liquidation is on average the same for the top-five special servicers at 13 months.

Andrus isn't surprised by this, explaining that the market finds equilibrium quickly. "An underlying asset is worth what the market will pay for it, no matter who the servicer is - albeit sometimes different decision-makers can influence the value."

Looking ahead, it's unclear what loss severities are likely to arise from extensions because their impact won't be recognised for several years. But Andrus' hunch is that modifications will certainly prove to be a better resolution strategy than fire sales.

"If market conditions continue to improve, special servicers will be less likely to foreclose and more willing to modify," he adds. "But if there's no hope for the asset, they're more likely to foreclose and crystallise the loss. Equally, if market conditions deteriorate or uncertainty increases, they will take the losses and move on."

Special servicers have generally done a good job, given the hand they've been dealt, according to Andrus. "They've had to make some tough decisions in a fast-moving environment. However, I'd like to see them move away from the idea that all borrowers are bad. This is short-sighted because different borrowers are driven by different situations and interests," he observes.

As of 31 December, the 35 US CMBS special servicers rated by Fitch actively special serviced 4,586 loans and 957 REO assets totalling US$90.7bn, an increase of 22.7% by unpaid principal balance (UPB) and 25% by asset count from a year previously. Non-REO specially serviced assets increased 15% by UPB to US$80.6bn from US$69.9bn, while REO assets more than doubled by UPB to US$10.1bn from US$4bn.

Year-end statistics for Fitch's active special servicer portfolio (not including REO) indicate that: LNR had US$23.8bn in UPB across 1,227 loans; CWCapital had US$15.3bn across 679 loans; C-III had US$11.9bn across 726 loans; Midland had US$6.2bn across 440 loans; and Berkadia had US$2.5bn across 311. In terms of CMBS in REO, CWCapital had US$4.1bn across 332 assets; LNR had US$2.7bn across 226 assets; C-III had US$1.3bn across 89 assets; Berkadia had US$473.8m across 106 assets; and Midland had US$130.4m across 35.

CS

Ratings

Ratings bottleneck

Banks rush to maintain ECB repo-eligibility

The ECB extended its minimum two ratings repo-eligibility requirement to all existing ABS on 1 March. Some banks appear to have rushed their preparations, however, with one in five deals failing to meet the deadline.

Asset-backed analysts at RBS indicate that the outstanding volume of single-rated retained euro-denominated ABS stood at just over €200bn (accounting for some 237 bonds), as at 24 February, or around 30% of the total amount of retained ABS outstanding. Banks in Italy, Spain and the Netherlands accounted for over 70% of this stock.

Under the ECB's criteria, bonds must now have at least two ratings of triple-A at launch and maintain a rating of at least A3/A- or higher until maturity. The analysts estimate that as much as €85bn worth of retained ABS bonds gained additional ratings in the three business days between 22 and 25 February, with some €36bn of retained paper sourcing additional ratings the previous week.

Fitch, for one, says it received most ECB-related rating requests in 4Q10 - although some came in as late as January. Since the agency rates them as if they are new deals, the process takes 6-8 weeks and sometimes longer.

Fitch's head of European structured finance Marjan van der Weijden suggests that some sponsors may have underestimated how many different parties would need to be involved or perhaps expected the deadline to be extended. "Most sponsors that failed to meet the deadline have accepted that it's too late and will probably take the deals temporarily out of their ECB portfolio until the second rating is assigned. Others will still go through the process in the coming months in case they need to access repo facilities in the future," she adds.

Most of the restructurings undertaken to comply with Fitch's rating criteria involved updating legal or counterparty documentation. In some cases, the deals weren't performing well, so the senior notes were retranched. Generally the transactions benefitted from additional credit enhancement that had built up from launch.

Van der Weijden notes that Fitch's ratings pipeline still has a substantial component of regulatory-driven ratings, with the remainder being new issues. "We are hoping the ratio will be more like 50/50 this year, but southern European countries continue to remain heavily reliant on repo."

ABS strategists at UniCredit warn that more than 3% of currently eligible outstanding exposure (accounting for 58 tranches) is close to breaching its single-A minus assessment and thus may lose eligibility in the future. Spanish exposures look especially at risk, with some €90bn (accounting for 252 tranches) at the cusp, compared to €69bn of Italian and €41bn of Dutch exposures.

Meanwhile, banks with single-rated retained securitisations outstanding that aren't seeking a second rating have two other options to consider, according to the RBS analysts. First, they could restructure them to allow for placing or syndication into the investor base - though the depth and clearing price of primary demand would be key considerations. Second, they could tap the private market using their retained ABS.

While a few issuers can be expected to test the first alternative, the second option would likely appeal in cases where a second ECB-compliant rating is unattainable without uneconomic structural support or credit enhancement. The analysts point out that most Greek securitisations fall into this category, with a number of Irish bonds also likely to face such risks in the coming months, given sovereign and/or seller rating ceilings.

ABS utilisation at the ECB liquidity window spiked from €109bn in 2006 to €488bn as at 3Q10, or from 11% to 24% of total collateral posted.

CS

CMBS

Replacement repercussions

Barriers to entry for Euro special servicers remain high

The replacement by Solutus Advisors as special servicer on seven European CMBS within a few weeks sparked controversy because of the perceived speed in which it was done. But the episode also highlights the many barriers to entry for European special servicers.

Solutus replaced Hatfield Philips on five DECO transactions and Capita on two Titan Cornerstone transactions, representing an outstanding securitised balance of £84m, at the end of January. A Fitch report warning about affiliations between special servicers and operating advisers - albeit it didn't mention Solutus by name - then served to heighten the controversy (see SCI 2 February).

Edward Register, senior director at Fitch, suggests that the controversy over Solutus was spurred by several loans being transferred to the firm within a few days, initiated by the same controlling class noteholder. "This would raise industry eyebrows, no matter which servicer had been involved."

But Solutus md Darren Davey says the reality is that the firm worked on two of the loans for over three months and on the other five for six weeks before they were transferred. It developed provisional business plans for all of the loans and, as well as engaging with the operating adviser, logically did the same with the rating agencies before they were transferred.

Further, Davey stresses that Solutus has no affiliations with any controlling class investors. The operating adviser on the seven transferred deals - Cheyne Capital - drove the replacement because Solutus brought the best ideas for loan recovery, along with a strong knowledge of the loans.

"It was not by design that Cheyne was the first in terms of special servicing mandates," he continues. "There is more than one investor in controlling classes and we speak to most, if not all, of them. We've always had a good dialogue with operating advisers, something which is based on relationships we've built up over the years."

Underlying the controversy is disquiet about Solutus' small size and lack of track record. Register points to the issue of operational risk in special servicer replacements, which stems from concern about why a new special servicer was put in that position and whether it is equipped to properly manage the work-out of a defaulted loan. The agency understands that special servicers may be replaced for lack of action or concerns over the ability of the original special servicer to effectively manage the troubled asset; however, this may not always be the case.

"Special servicer capacity has been a topic of considerable debate among market participants over the last two years. The issue is essentially two-fold based on quantity and quality: do servicers have enough resources to cope with the increasing number of problem loans and what is the experience of the relevant staff?" Register explains.

Fitch's concern about Solutus was driven by the fact that it is a start-up and is heavily reliant on the support of external resources, particularly DTZ and First Investments. But Register understands from conversations with the firm that its focus is on smaller UK retail assets - a sector which some market participants are concerned may be overlooked, given the focus on larger, more complex loans.

"So taking this approach could prove to be positive - albeit there is, as yet, no performance data to back it up," he comments. "There's also no certainty that Solutus will continue to only focus on this sector."

The firm was established last October by Davey and co-md James Bannister, who began their CMBS servicing careers at Morgan Stanley when the ELOC programme launched. The pair then moved to Deutsche Bank when the DECO platform was established and ran a €20bn book focused on the UK and Germany.

Among the distressed situations Davey and Bannister were involved in was the Hertie department store portfolio (a €320m German loan), for example, where both the sponsor and tenant became insolvent. The pair worked pro-actively with those managing the estate and pursued a liquidation of the portfolio outside of insolvency, with proceeds exceeding market values, servicing debt and amortising the loan by over €100m prior to their departure.

"We both have 10 years of experience in CMBS servicing in Europe, which is roughly as long as the lifespan of the market, and have worked at arguably the best platforms," Davey observes.

Solutus differentiates itself from other special servicers by focusing more on the underlying assets, he adds. "While focusing on all opportunities possible with both the debt and the asset, common sense suggests that in certain cases we can't do much with the loan, so we focus on the property. We bring a dedicated approach in terms of identifying where cash is available and maximising the benefits to be had from it. We've lined up resources and ideas for every deal in our pipeline."

However, Davey concedes that Solutus is an easy target because it is a start-up backed by private equity capital. Yet this brings with it true independence from those appointing the firm as a special servicer or adviser, he notes.

"Our business plan is to start small and grow organically," Davey explains. "The distress in the European CMBS market is not a problem with a short-term fix, so there's time for us to establish a core foundation and create a track record under the Solutus brand."

At present, the firm's portfolio only contains UK exposures. But Germany is the next logical market for it to expand into, based on the experience of Davey and Bannister.

And whether Solutus pitches to be the named special servicer on new CMBS issues will depend on the business case. "We can raise capital quickly as long as there is a good business case. At the moment, we have less than two loans per asset manager, but our structure is dynamic enough to add resources as necessary," Davey notes.

The decision to establish the firm stems from conversations with many market participants, during which their desire for improved special servicing and increased competition became apparent. But the experience has proved that special servicing in Europe is inherently a closed market with many barriers to entry, according to Davey.

Register agrees that barriers to entry for European special servicers are high. "Prior to the crisis, Hatfield Philips and Capita dominated the market; then CBRE launched a servicing business. It's always challenging for new entrants, especially now with limited origination and new issuance activity being undertaken by the traditional CMBS players."

Nonetheless, a handful of servicers experienced in managing non-performing loans and commercial real estate are at present reviewing a move into European CMBS, possibly in conjunction with their investment partners. This would suggest that many loans with issues remain, some of which may be transferred into special servicing. At the same time, some investors have sold - or are looking to sell - their holdings and the buyers may be more interested in working with an experienced special servicing partner that they trust.

Indeed, special servicer transfers are expected to increase in the coming months as the distress in European CMBS continues to be worked out. The reasons for transfers are loan-specific, but are often because the operating adviser believes a change in special servicer will increase recoveries.

As holders of the first-loss in a deal, operating advisers have the right in most documentation to replace the special servicer. However, Davey notes that although operating advisers have consultation rights, special servicers shouldn't be unhealthily influenced by them.

Overall CMBS investors appear to be more engaged in the servicing process across the capital structure, which Register notes is positive for the market. "Controlling class representatives are looking at all their options, including replacing the special servicer, but whether this actually translates into more replacements going forward remains to be seen."

He concludes: "Some investors have always been active, especially towards the bottom of the capital structure, and - given the current environment - it's not surprising that senior noteholders are becoming more active. Equally, servicers have been trying to improve their communication and engagement with investors, which is also positive."

CS

ABS

US ABS market plays it safe

The US consumer ABS market has had a quiet week, with both new issue and secondary trading volumes remaining consistent. At the same time, triple-A paper still appears to be a favourite as investors continue to play it safe.

"Everything's steady at the minute; we haven't been all that responsive to the broader market sell-off and that's not too unusual. We usually do lag bottom markets," one consumer ABS analyst says.

The new issue pipeline continues to build, the analyst confirms, while the general pace of activity also remains consistent. Primary supply is exceeding last year's levels, with 2011 already seeing US$17.4bn come to the market. However, the analyst notes: "In view of pre-crisis volumes, supply is still restrained."

At the same time, she says: "We're seeing good auto and esoteric-type deals trade into the secondary market - not huge volumes, but it's all positive." Triple-A paper continues to be the secondary market's main focus, with investors repeatedly returning to the same issuers - prompting the analyst to suggest that market participants are seeking a "safe haven".

Overall, market technicals are encouraging favourable valuations across the capital structure, but particularly in triple-A paper. However, spreads have softened slightly in off-the-run products - albeit only by one or two basis points.

Looking ahead, the analyst predicts that the market will continue to move in the same direction. "However, if things continue to go downhill in the Middle East, then that volatility will inevitably affect the structured finance market - it just hasn't done so yet," she warns.

LB

ABS

Euro ABS market sees a squeeze

Continued spread tightening has driven a squeeze in the European ABS market this week. At the same time, Lloyds TSB's Gable Funding CLO has grabbed investor attention due to its diversification appeal.

"The underlying tone is that spreads have been squeezed in a little due to the lack of primary supply. It doesn't help either that there isn't a huge amount of secondary paper out there," one ABS trader confirms. With a lack of end-investor buying at the tighter pricing levels, he notes that the market is suffering from a general dry spell.

However, the trader believes that primary supply will pick up over the next few weeks. Until then, it is bid-list volumes that will continue to generate activity.

"The lists are active across a whole range of asset classes. Whether it's CLOs, autos, credit cards or RMBS, it's the lists that investors are looking at right now. In terms of both supply and selling, we're seeing a free use of bid-lists at the minute," the trader notes.

Elsewhere in the market, Lloyds TSB's latest CLO was announced this week - the £1.45bn Gable Funding. The unusual private finance initiative collateral is attracting great investor interest, the trader says.

"It's definitely a deal that everyone has sat up and paid attention to," he adds.

LB

CLOs

CLO market softens

February's high bid-list volumes have left the European CLO market feeling overexerted, as it creeps into its second quiet week (see SCI 28 February). At the same time, both the US and European markets have suffered from price softening over the past week.

"We've hit a quiet period, which was prompted by the half-term holidays. However, we've had a couple of bid-lists in over the last week, so activity is still pushing through," one CLO trader says. He is expecting two lists to launch today - both offering European equity pieces.

The trader continues: "Our take on the market right now, and certainly in the US, is that things have got a little softer and weaker. Generally, levels are off by a few points down the capital structure."

He says that the weakness perceived in the US also extends to Europe, although he notes that the European market is more difficult to analyse in this regard. "The few trades we've seen here and there are leading us to believe that things are off. The tell-tale sign is that there's a bit more selling in the street, which always leads to weakness - if things were strong, then people would be selling direct to customers."

Another factor reflecting the market's weakness is a sudden drop in bids. "A few weeks ago, we would have expected bonds to get above 95; now, we're seeing an 83 bid. To put this into perspective, this does happen all the time in the senior market, but when you're sensing this price shift on a more frequent basis, it leads you to feel that things are becoming weaker," the trader notes.

In looking for an explanation, he concludes: "I think that people are finally suffering from bid-list fatigue; it's slowed the market right down."

LB

CMBS

US CMBS stabilising

Despite a slight widening of spreads, it has been another good week for the US CMBS market as prices begin to stabilise. Meanwhile, JPMorgan priced its latest transaction today.

"So far this week, equity is down and spreads have widened a little," one CMBS trader says. For example, the A4 tranche of the benchmark GSMS 2007-GG10 bond has widened by 25bp from its tightest point a few weeks ago.

Although activity in the CMBS market this week has lessened slightly compared with recent weeks, the pace is still fairly strong, the trader notes. "Some class B and C tranches were offered over the last few days and they traded really well - into the high 80s for the AJ sector. The class B of the GSMS 2007 deal traded well too."

Driving the activity is a combination of new issuance and bid-lists. So far this year, the market has seen four new issues, amounting to approximately US$7bn. "We're expecting a few more new issues to come before quarter-end, so we'll be looking at a total of around US$9bn this quarter," the trader says.

This new issuance, he explains, supports the current overall spread tightening trend. Despite the slight widening seen this week, prices are still tighter than at the beginning of the year and appear to be stabilising. "People see the new issues pricing and it really helps support the secondary market - it's good for a lot of the old legacy deals."

However, one issue to be aware of over the next period is loan modifications. "This is going to be one to watch for the people who either hold or trade these bonds. I believe it will be important for some time because of the effect the modifications have on tranches," the trader warns.

The big news of the week, however, is the pricing of JPMorgan's Commercial Mortgage Securities Trust 2011-C3 deal. "The 10 year triple-A tranche priced at 12bp wider than the previous Wells Fargo deal," the trader confirms.

LB

ABS

Life settlement deals eyed

With investors, arrangers and originators expressing a renewed interest in life settlement securitisations, S&P says it will consider rating proposals in this sector, providing they address certain risks. Due to the unique nature of the risks presented, the agency has not rated any life settlement securitisations to date.

In life settlement securitisations, the source of cashflow to pay interest and principal on the rated securities primarily comes from death benefit payments from a pool of life insurance policies. Credit ratings on insurance carriers can range from investment grade to not being rated at all and therefore impact the credit characteristics of a transaction.

With this in mind, life settlement securitisations present a number of key rating risks. First, S&P believes that the number of lives comprising the pool and mortality underwriting history affect the credit quality of a pool of life policies.

These measures, however, do not necessarily address the mortality expectation for a particular individual. While life expectancy providers may argue that their estimates are accurate, the agency says that significant volatility is possible.

Second, small pool sizes can intensify the impact of inaccurate estimates of individual life expectancy and uneven distribution of policy amounts. Further, an original purchaser's or securitisation originator's short underwriting history makes it difficult to assess the accuracy of underwriting decisions - potentially to the detriment of bondholders. These risks, S&P says, may be mitigated in larger pools and in situations where the original purchasers or the securitisation originators have robust underwriting histories.

Third, life settlement securitisations present legal and regulatory risks beyond those associated with isolating the assets in the collateral pool from the bankruptcy of the participating entities, according to the agency. Noteholders in a life settlement securitisation would generally not have an insurable interest in the lives covered by the pool of policies, yet they become the ultimate recipients of the death benefit. The absence of an insurable interest where required could render the policy unenforceable, in turn affecting the payment of the death benefit.

Fourth, there are risks related to the administrative duties associated with managing a portfolio of life policies, which are handled by the administrator and engaged by the securitisation issuer. The administrator may also perform certain premium optimisation activities that typically involve a regular review and determination of the optimal level of premium payments to keep the policy in force. Due to the complexities of this asset class, finding a suitable substitute back-up administrator - if needed - may be challenging, S&P says.

The agency believes that these risks, as well as the industry's uncertain legal and regulatory environment, could cause difficulty in issuing ratings. However, it notes that the risks are not exhaustive of the elements it would consider in the rating analysis of a life settlement securitisation; rather, the objective is to provide transparency.

LB

CMBS

GGP refi plan put forward

General Growth Properties (GGP), the largest sponsor of legacy US CMBS and the borrower behind most modified conduit loans, has disclosed its refinancing plans for already securitised assets and intended future CMBS participation. It is targeting US$5bn of refinancing for 2011 and some future securitisation is expected.

So far this year, GGP has already refinanced two properties for US$315m and it is in the process of closing another loan for US$185m. The firm says its reasons for refinancing include the need to pay down at maturity, reduce debt service and up-finance under-leveraged assets.

The refinancing of assets requiring some form of prepayment penalty is thought unlikely in the near term, however. Nevertheless, MBS analysts at Barclays Capital believe the refinancing of certain properties will trigger substantial pay-downs on the respective A2 tranches from various deals.

GGP is documenting loans on six properties that are likely to refinance in Q211. The BarCap analysts believe these six properties are Deerbrook Mall (securitised in LBUBS 2005-C5), Northridge Fashion Center (WBCMT 2006-C26), Park Place (WBCMT 2004-C14), Providence Place (COMM 2001-J2), Willowbrook (GSMS 2001-GL3) and The Woodlands Mall (GCCFC 2004-GG1). These properties have outstanding loan debt of around US$1bn, which refinancing may increase to US$1.47bn.

GGP has not specified whether these new loans will contribute to new CMBS transactions. However, the analysts believe some of the new loans will be securitised and that, as GGP intends to stick with non-recourse financing, the CMBS market could play an important role in its refinancing initiative.

The maturities for the six loans are expected between 2014 and 2016. The analysts suggest that the desire to refinance is therefore not driven by maturity dates, but by reducing monthly debt service volume. The loans are expected to be refinanced with longer durations, at least some of which the analysts reckon will be amortising.

More pressingly, the analysts believe there will also be loans maturing in 2011 that are likely to be refinanced this year. Meanwhile, based on the US$5bn target, a number of assets that had their maturity date extended will not be refinanced this year.

The top 125 of GGP's 169 assets (ex-special consideration) account for around 87% of core NOI. Its target is to have about 150 properties in the portfolio, principally shopping malls.

As such, GGP intends to sell or give back all special consideration properties, strip malls and office properties. This strategy also implies that about 19 of the US malls will be sold, with the analysts expecting opportunistic rather than forced dispositions.

They add that for the CMBS portfolio, it implies that some properties that currently qualify as 'other malls' and are not part of the 'special consideration' portfolio might also be sold at a discount or even handed back to the lender, resulting in losses to the applicable trusts.

JL

RMBS

Foreclosure complexity highlighted

A bill passed last week in the Arizona Senate that voids foreclosures without full title history has re-emphasised the complexity of foreclosure requirements. If the bill passes in the House, many borrowers could begin challenging foreclosures in this non-judicial state - thereby pushing foreclosure timelines even further out.

Chain of title remains an important issue, according to NewOak ceo Ron D'Vari. He points to the lack of recognition around how many government bodies can get involved in the process or the impact of state variability in terms of technicalities that need to be met in order to foreclose as a last resort in resolving a non-performing mortgage.

Furthermore, D'Vari says it is becoming apparent that many servicers and investors did not fully understand the complexity of foreclosure compliance requirements. "Some State rules can prevent an efficient solution being implemented, with the timelines involved making it even costlier. I'd anticipate 5% to 10% less recovery for every additional six months it takes to foreclose. Provisions for these extra costs will eventually be priced into the new market when it re-starts."

Certainly MBS analysts at Barclays Capital expect that foreclosure costs will increase in Arizona if the bill passes the House. "Though banks may be able to re-file foreclosures after rectifying the documents, timelines will be longer and costs to foreclose will rise," they note. "Recent developments have only reinforced our long-held view that foreclosures will happen, but will take longer as potential lapses become apparent. And, at the margin, they will hurt sectors where liquidation recoveries are a bigger part of cashflows."

Lack of clarity around foreclosures, reps and warranties and the implementation aspect of Dodd-Frank continue to create uncertainty about what the ultimate RMBS framework will be in the US, says D'Vari. Nevertheless, Redwood Trust's recent Sequoia 2011-1 issue demonstrates that appetite remains for non-agency paper (see SCI 18 February) and a couple of other transactions are expected to test the market soon.

CS

ABS

Guggenheim preps prop trading platform

Guggenheim Partners has launched Guggenheim Global Trading (GGT), which will invest capital on behalf of the firm, its shareholders, its affiliates and a small group of institutional investors. Based in Purchase, New York, GGT will be headed by Loren Katzovitz and Patrick Hughes, both managing partners of Guggenheim Partners.

GGT has an initial target allocation of approximately US$500m, with a longer-term goal of US$2bn over several years. The team will consider raising capital on a limited basis from third-party investors, but only if they agree to being a Guggenheim equity partner. GGT plans to hire approximately 20-25 trading groups within the next 12 months, it says.

"As a private firm, we believe there are attractive opportunities to invest capital supporting trading strategies with high probabilities of success, particularly as banks are required to divest or significantly reduce their proprietary trading activities and smaller hedge funds find it uneconomical to continue," says Katzovitz.

Hughes adds: "Legislative and regulatory changes globally have created a unique timing opportunity with regard to the availability of high-quality traders and trading groups. The launch of GGT, however, is not simply about access to talent; we further believe that the reduction in proprietary trading globally, as a result of the new regulatory regime, should ultimately result in wider investment spreads in arbitrage and other strategies."

In addition to its headquarters in Purchase, GGT will have trading locations in Chicago, San Francisco, Geneva and a yet-to-be-determined location in Asia.

CDO

Structured credit sales head named

Citi has appointed Glen McDermott as head of structured credit product sales for Asia Pacific, based in Hong Kong. He will be responsible for selling structured credit products to the bank's institutional clients in the region, reporting to ‪David Ratliff, head of investor sales for Asia Pacific. Prior to joining Citi, McDermott was global head of alternative assets for Amias Berman in Hong Kong.

CDS

OTC solutions md named

CME Group has appointed Michel Everaert as md in its OTC solutions group. Based in London, Everaert will be responsible for overseeing OTC pre- and post-trade products, while helping to further expand the firm's CME ClearPort product line and OTC open clearing solutions. He will report to Laurent Paulhac, CME's OTC products & services md.

Prior to joining CME, Everaert served as cio of IMEX Group, an investment vehicle owned by a subsidiary of the sovereign wealth fund of the State of Qatar. He has also served as cio of e-commerce at GFI Group.

CDS

Vendor strengthens Aussie presence

Xenomorph has relocated chief technical architect and founding director Chris Budgen and senior developer Irina Taran to Melbourne and Sydney respectively. The move aims to boost the firm's presence in Australia while enhancing its technical support offering to regional clients. London-based Brian Kristensen continues as head of product development and takes over responsibility for the day-to-day running of the product development team.

"Financial markets are fundamentally based on data; how data is managed and how data is analysed has never been more important in risk management, trading and regulatory compliance. As the Australian and wider Asian market expands, we sense great opportunity in assisting financial markets institutions in the region to reach better decisions based on higher quality, more transparent and more consistent data," says Budgen.

CDS

SEF surveillance vp hired

National Futures Association (NFA) has appointed Edward Dasso as vp of its market regulation group, where he will oversee the surveillance of swap execution facility (SEF) procedures. Dasso joins the firm from InterContinental Exchange, where he served as the manager of market regulation. He previously spent several years at NFA as md of the trade practice and market surveillance team (TPMS).

"Due to the Dodd-Frank legislation and rules recently proposed by the Commodity Futures Trading Commission, NFA anticipates an expansion in its TPMS clients within the next several months," says NFA president Dan Roth.

He adds: "The CFTC has proposed allowing SEFs to outsource certain regulatory functions to NFA and several SEFs have already approached us about performing these duties."

CMBS

Asset manager adds real estate md

Kohlberg Kravis Roberts & Co (KKR) has appointed Ralph Rosenberg as md to lead its global real estate investing efforts. Rosenberg's principal responsibility will be working across KKR's global business to find real estate opportunities for the firm's pools of capital, including equity, debt and special situations investments.

Rosenberg was previously a partner at Eton Park Capital Management, where he was responsible for its strategies in the commercial real estate debt and equity markets. Prior to this, he was at Goldman Sachs, where he co-headed its special situations group.

CMBS

CRE firm adds structured products head

Ranieri Real Estate Partners (RREP) has appointed Debra Huddleston as md and head of its real estate structured products group. Prior to joining RREP, Huddleston was md at BlackRock in its financial markets advisory group. Prior to this, she was md and head of special situations in Credit Suisse's residential mortgage department.

CMBS

New partner for investment advisor

Torchlight Investors has appointed Steven Schwartz as partner and md. In this new role, Schwartz will focus on arranging the firm's debt investments and will report to Dan Heflin, Torchlight's ceo and cio. He comes from JPMorgan, where he was co-head of the CMBS group.

RMBS

Third charge brought over TBW fraud

The US SEC has charged former vp and head of mortgage warehouse lending at Colonial Bank, Catherine Kissick, with conducting a US$1.5bn securities fraud scheme.

The SEC alleges that Kissick enabled the sale of fictitious and impaired mortgage loans and securities from the mortgage warehouse lending division's largest customer - Taylor, Bean & Whitaker Mortgage (TBW) - to Colonial Bank. This then caused the securities to be falsely reported to the investing public as high-quality, liquid assets.

Kissick pleaded guilty to criminal charges filed by the Department of Justice in the Eastern District of Virginia. The SEC previously charged former TBW chairman and majority owner Lee Farkas in June 2010 and charged TBW's former treasurer Desiree Brown last week (see SCI 25 February).

According to the SEC's complaint, Kissick along with Farkas and Brown perpetrated the fraudulent scheme from March 2002 to August 2009, when Colonial Bank was seized by regulators and Colonial BancGroup and TBW each filed for bankruptcy.

The SEC alleges that when TBW began to experience liquidity problems and overdrew its credit with Colonial Bank by approximately US$15m each day, the trio concealed the overdraws through a pattern of 'kiting' in which certain debits were not entered until after credits due for the following day were entered. In order to conceal this initial fraudulent conduct, Kissick, Farkas and Brown created and submitted fictitious loan information to Colonial Bank and created fictitious MBS assembled from the fraudulent loans. By the end of 2007, the scheme consisted of approximately US$500m in fake residential mortgage loans and approximately US$1bn in severely impaired residential mortgage loans and securities.

Without admitting or denying the allegations, Kissick consented to an order barring her from acting as an officer or director of any public company, or serving in a senior management or control position at any mortgage-related company or financial institution. The SEC's requests for financial penalties remain pending and are subject to court approval.

RMBS

Bank adds mortgage director

Deutsche Bank is understood to have hired Sean Dawson as a director within its mortgage principal investment unit. He was previously svp of securitised products at Citadel and prior to this was svp at Lehman Brothers.

ABS

SEC rating, clearing rules proposed

The US SEC has released two further proposals for comment in line with Dodd-Frank requirements. One would see the removal of references to credit ratings in certain rules and forms under the Investment Company Act of 1940 - including rule 2a-7, governing the operations of money market funds. The other is in connection with the operation and governance of clearing agencies.

Under the first proposal, a rating would no longer be a required element in determining which securities are permissible investments for a money market fund. A security would instead be an eligible investment for a money market fund if the fund's board or its delegate determines that the security presents minimal credit risks.

The proposed amendments also would remove credit ratings in three other areas: repurchase agreements, certain business and industrial development company investments, and shareholder reports.

The second proposal would require clearing agencies to: maintain certain standards with respect to risk management and operations; have adequate safeguards and procedures to protect the confidentiality of trading information; have procedures to identify and address conflicts of interest; designate a chief compliance officer; and disseminate pricing and valuation information if they perform central counterparty services for security-based swaps. The SEC also voted to reopen the public comment period for rules proposed in October 2010 to mitigate conflicts of interest for security-based swap clearing agencies and facilities and national securities exchanges that post or make available for trading security-based swaps.

Public comments for the two proposals should be received by 25 and 29 April respectively.

ABS

CPS secures credit line ahead of ABS return

Consumer Portfolio Services has entered into a US$100m two-year warehouse credit line with UBS Real Estate Securities. Loans under the facility will be secured by automobile receivables that CPS now holds or will purchase from dealers. The facility revolves during the first year and amortises during the second year.

"This transaction brings our total warehouse capacity to US$200m," says Charles Bradley, CPS president and ceo. "With our expected return to the term securitisation market in the next few months, we are well positioned to meet our contract funding needs."

ABS

IOSCO implementation underway

IOSCO's Technical Committee has published the results of a survey on the implementation of its September 2009 recommendations with respect to securitisation and credit default swap markets - the 'Task Force on Unregulated Markets and Products - Implementation Report' (see SCI issue 151). It has also made two further recommendations.

The report shows that all jurisdictions surveyed by the task force had at least one, if not multiple initiatives in progress to implement the recommendations on: disclosure; the retention of economic interest; investor suitability and international coordination; and regulatory cooperation. Most measures are expected to be implemented in 2010 and 2011, the committee says.

Among the major themes that emerged from the review is that the 'skin in the game' concept is endorsed by most jurisdictions at this time. Furthermore, the majority of member jurisdictions are expected to implement the requirement for originator/sponsors to retain long-term economic exposure to securitisations.

In addition, in many instances current laws, regulations or market practices for offering documents often cover elements of disclosure and third-party service providers. Most jurisdictions are either enhancing or considering enhancements for these areas.

In relation to investor suitability, meanwhile, most jurisdictions are refining the definition of a sophisticated or wholesale investor. Depending on the jurisdiction, a greater burden will be put on the issuer/seller or on the investor.

Finally, the report shows that industry bodies are working with regulators on various unregulated markets and products-related initiatives.

The Technical Committee has made two further recommendations in its report, however. First, it encourages regulators to improve disclosure standards for private or wholesale offerings of securitised products. Second, it says that regulators should engage in international cooperation towards convergence of national regulations, where desirable, and review progress regularly.

CDO

Tremonia senior noteholders paid out

Junior noteholders of Tremonia CDO 2005-1 won't receive any of the proceeds from a recent auction of its English security assets. The auction took place on 1 March at BDO Ireland (see SCI 9 February).

Bids for all of the securities were accepted at the auction for a total sum of US$474.7m. Settlement is scheduled to take place tomorrow (4 March).

Upon settlement, all of the securities will have been realised. Taking into account the cash held by the issuer prior to the auction, the receivers anticipate that the assets of the issuer will only be sufficient for distributions to be made to the holders of class A-1 notes and prior ranking creditors under the enforcement priority of payments.

The receivers anticipate that an interim distribution of the proceeds of the auction will be made in accordance with the enforcement priority of payments as soon as reasonably practicable. No problems with settlement are foreseen, given the nature of the bidders.

CDO

Concord CDO funds released

The Delaware Supreme Court has unanimously affirmed that the notes issued by Concord Real Estate CDO 2006 were validly cancelled by Concord Debt Funding Trust as of 5 January 2010 and are therefore no longer outstanding. As a result, the CDO trustee is expected to release the funds that have been held in escrow, pending the resolution of the matter.

Once released, the CDO will be able to: make all current and past due payments on its remaining notes; re-invest approximately US$33m in new assets for the benefit of all of the CDO's noteholders and Concord; and make distributions to Concord on account of its equity interest in the transaction.

These expected continuing distributions, Concord says, will enable it to satisfy its obligations and make distributions to its equity holders.

CDO

Re-rankings for CDO sovereign obligors

The top 25 most widely referenced sovereign obligors in S&P's outstanding rated US synthetic CDO (SCDOs) saw a handful of rating changes in the second half of 2010. In addition, early terminations/redemptions among the tracked SCDOs with sovereign exposures caused modest ranking moves, according to the agency.

"We recently reviewed about 700 corporate US SCDOs and established that about 351 of them reference one or more sovereign obligors. This represents a slight decrease from the roughly 400 SCDOs referencing one or more sovereign obligors in second-quarter 2010," says S&P analyst Jimmy Kobylinski.

The agency believes that the continued decline in outstanding transactions exposed to sovereign debt in second-half 2010 relates more to the smaller universe of outstanding SCDO transactions than to a change in market sentiment on sovereign debt. During 2H10 five-year CDS spreads shrunk for 17 of the top 25 sovereigns.

The bulk of S&P-rated SCDOs' exposures lie within four sovereigns that represent more than 50% of its SCDO reference entities - South Africa, the United Mexican States, Korea and the Russian Federation.

Sovereign debt reference entities account for less than 1% of the 351 SCDO transactions. However, S&P has identified 1,063 references to various sovereign obligors or their government-related entities among its SCDO portfolio.

CDS

EU bans naked sovereign CDS

A ban on naked sovereign CDS and a requirement that traders settle their uncovered positions by the end of each trading day were two key outcomes of the Economic Affairs Committee vote on a draft EU regulation on short selling and CDS. MEPs also inserted a requirement that short sale transactions be reported less often, but beefed up the rules to ensure that fines are dissuasive.

The committee position would prohibit anyone from being involved in sovereign CDS transactions if they do not already own sovereign debt linked to that CDS or securities whose price depends heavily on the performance of the country. The aim of the position is to set a very tight deadline for converting a naked short sale into a short sale. A seller failing to make the conversion by the end of the trading day would incur fines that the amended text states "must be sufficiently high to prohibit any profits being made".

The committee position imposes further reporting requirements on investment firms, particularly in exceptional circumstances. It also allows national supervisory authorities to require lenders to notify them in exceptional situations. In emergencies, national authorities will also be required to provide more information within 24 hours to the European Securities and Markets Authority (ESMA), when requested.

However, the committee position only requires investment firms to report on their short sale transactions at the end of the trading day, rather than reporting each short sale as it happens, as proposed by the Commission. Investors would also be required to publically disclose less information than would have been required by the Commission's original proposal. The regulation is expected to be in force by 2012.

However, ahead of the Committee vote, AIMA ceo Andrew Baker warned of the consequences of the ban. "If a ban or restriction on entering into net short positions via sovereign CDS was to be enacted, it would affect the efficient functioning of global debt markets and have far reaching and substantial negative consequences," he commented. "Debt markets would be less efficient, liquid and transparent. The cost of borrowing would increase and the availability of credit to borrowers would decrease, with a concomitant negative impact on growth and jobs."

CDS

Rule changes for CDS indices

Markit has made changes to certain rules governing its iTraxx Europe and CDX North America family of CDS indices. The new rules come into effect ahead of the index rolls later this month.

The rule changes introduce the formal use of CDS trade volume data from the DTCC trade information warehouse (TIW) for determining which entities will be included in Markit's iTraxx Europe, iTraxx Europe Crossover, CDX.NA.IG and CDX.NA.HY indices. New constituents of the CDX.NA.HY index will be selected using iBoxx liquid high yield sector weights, as well as trade activity data from the DTCC TIW.

Also, with regard to Markit's iTraxx Europe index, entities will now need to be more liquid than 75% of existing index constituents in their sectors - rather than 50% previously. The least liquid entities in each sector represented in the index will be excluded.

Finally, financial sector entities will no longer be eligible for inclusion in the iTraxx Europe Crossover index.

CDS

Dangers of naked sales ban outlined

In an open letter addressed to European Parliament Chair of the Economic and Monetary Affairs Committee Sharon Bowles and Pascal Canfin, the Committee's Rapporteur on the draft EU regulation on short selling and CDS, EDHEC-Risk Institute has warned of the dangers of prohibiting naked sales of sovereign credit default swaps.

Besides the fact that the lack of convergence on these issues with the US authorities leaves little hope of the measures being effective, EDHEC-Risk Institute believes that the proposal would run up against legal and practical obstacles that would make it inapplicable or counterproductive. It also indicates that it will be impossible for intermediaries and ultimately for regulators to verify investors' holdings of the securities representative of the risk the CDS are assumed to cover.

The EDHEC-Risk Institute says that the prohibition would make it harder for countries to manage the interest rate risk on their debt actively, as their counterparties would then no longer be able to hedge the country risk of the IRS. This active management of the yield curve is a major component in the optimisation of the cost of public debt, it notes.

Further, the EDHEC-Risk Institute states that the very strict definition of a naked sale would keep investors who finance public investment - or companies that enter into contracts with sovereign nations or with state-owned companies - from hedging the default risk of their counterparties. At a time when public-private partnerships and private financing of public infrastructure projects are considered one of the drivers of global growth, making it harder to manage country risk may increase the costs of these partnerships.

Finally, the EDHEC concludes that by making the hedging of default risk more complex, markets may be deprived of the debt of countries with low ratings, of investors and thus of liquidity - which will inevitably increase the cost of this debt.

CMBS

CMBS loan liquidations fall in February

The dollar amount of US fixed rate CMBS loans that were liquidated in February dropped by 54% from January's level, according to Trepp. 106 loans with a total balance of US$815m were liquidated during the month.

The losses on those loans total about US$292m - representing an average loss severity of 35.9%. That loss severity value is below the average loss severity of 43.8% over the last 12 months. Special servicers have been liquidating at a rate of about US$944m per month over that time, indicating that this month's liquidation figures represent a below average reading.

After accounting for 'small-loss' loans, the average loss severity jumps up to 49.6% for February - representing an increase of about four points from January's reading. For the last 12 months, the average monthly loss severity has been 57% on this basis.

CMBS

CMBS research platform linked

Trepp clients now have a direct feed to S&P's commercial mortgage research headlines, with links to deeper research provided on the agency's global credit portal investor analytics platform. The research offering includes analysis and commentaries from S&P Valuations and Risk Strategies across the structured finance marketplace.

"This integration ensures that our real-time market news and deep-dive research is easily accessed by the active market participants who need it most. By creating seamless links between our research and Trepp's analytics, we are helping to streamline the flow of information in the structured finance markets," says Sonia Kim, md, global credit portal at S&P.

CMBS

Governance key for Japanese CMBS extensions

Governance and property quality are important when it comes to extending loans in Japanese CMBS deals, according to Moody's. The agency reports that Japanese loan extensions have been structured in accordance with criteria stipulated in loan documents or through consensual decision-making between lenders and CMBS investors.

The maturities of 29 loans, amounting to ¥284.2bn, have been extended so far for Japan CMBS - with 23 being based on the extension option or the internal tail period in accordance with the loan or bond agreements. They were extended as they satisfied certain conditions, such as passing DSCR tests, or with the consent of the trustees/investors.

The documentation of the six loans - backed by office buildings and a residential property in Tokyo - that did not incorporate such options were extended by the consent of the lenders and the CMBS investors. Of these, three loans were extended because of the expectation that they would be amortised by the strong and stable cashflows from their underlying properties.

During February five Japanese CMBS loans amounting to ¥23.4bn matured; three amounting to ¥13.8bn were paid down; two amounting to ¥9.6bn defaulted; one, amounting to ¥63.5bn, was prepaid; and one was recovered. None of the loans were extended. Defaulted loans amounted to ¥463.2bn at end-February 2011- up 0.5% from the previous month, Moody's concludes.

CMBS

Record high for CMBS late-pays

US CMBS delinquencies climbed to a new record high this past month, according to Fitch's latest index results for the sector. Late-pays rose to 17bp to close out February at 8.76% - surpassing the index's previous high water mark of 8.66%, recorded in September 2010. However, the rising influx of new issuance may help to stem future late-pay increases, the agency says.

"Though the pace of monthly defaults remains elevated, US CMBS delinquencies may be showing preliminary signs of stabilisation. A projected spike of new issuance will help to offset pay-down and liquidations in 2011 and thus slow the shrinkage of Fitch's rated portfolio," says Fitch md Mary MacNeill.

New delinquencies in February totalled US$2.6bn, including five Fitch-rated loans greater than US$100m - the US$320.6m 575 Lexington Avenue loan (New York office); US$250m Bush Terminal (New York industrial); US$177.6m Windsor Capital Embassy Suites Portfolio (hotels in various states); US$114.5m Granite Run Mall (Pennsylvania retail); and US$102.5m Douglas Entrance (Florida office). Each of these loans had already been in special servicing due to an imminent default.

Current delinquency rates by property type are as follows: 17.58% for multifamily, from 17.4%; 14.33% for hotels, from 14.43%; 9.4% for industrial, from 8.53%; 7.04% for retail, from 6.88%; and 5.85% for office, from 5.5%.

CMBS

Increase in CMBS delinquencies slows

US CMBS delinquencies had one of the smallest increases in February since the beginning of the credit crisis, according to Trepp, edging up by 5bp and putting the rate at 9.39%. However, this also represents the highest percentage of loans 30+ days delinquent, in foreclosure or REO in the history of the CMBS market.

The percentage of loans seriously delinquent is now 8.75%, an increase of 16bp. If defeased loans were taken out of the equation, the overall delinquency rate would be 9.9% - up 4bp from January. One year ago the overall US delinquency rate was 6.72%, while six months ago it was 8.9%.

One year ago the rate of US loans seriously delinquent was 5.97%, while six months ago it was 8.14%.

The rate of increase has averaged 23.8bp per month over the previous 12 months, after backing out the Stuyvesant Town impact in March and the Extended Stay Hotels impact in October.

CMBS

Assisted living CMBS prepped

Goldman Sachs is in the market with the US$325m GS Mortgage Securities Corporation Trust 2011-ALF, a single-loan CMBS secured by 29 assisted living facilities owned by 19 property companies. Collateral also includes the borrowers' interest in the leases and rents, interest in the operating revenues from the properties and the assignment of the cash management accounts.

Proceeds from the notes, together with additional equity, were used by the sponsors - Sunrise Senior Living and CNL Income Partners - to acquire the 29 properties from a joint venture between Sunrise and Arcapita. The portfolio is spread across 12 states, with the largest concentrations in New York (at 29.5%), Illinois (17.5%), New Jersey (14.3%) and California (12.2%).

Fitch notes that the three-year loan has strong structural features, including a lock box, up-front reserves for deferred maintenance and monthly reserves for taxes, insurance, ground leases and capex. In addition, there is a cashflow sweep upon a trigger event of net cashflow falling below US$38m.

Interest is fixed over the loan term at a weighted average coupon of 6.1%. The loan is interest-only throughout the term.

Pacific Life Insurance Co will act as operating advisory on the transaction.

RMBS

Consecutive slow-down for pending home sales

US pending home sales have slowed for the second straight month, according to S&P. The National Association of Realtors reports a drop in pending sales by 2.8% in January, following a 3.2% decline in downwardly revised December and a 10.5% increase in November. The index is 1.5% below its level a year ago and 30% below the early-2005 peak.

"This latest trend suggests that we are likely to see a slight decline in February's existing home sales because pending sales usually lead existing home sales by one to two months," says S&P analyst Erkan Erturk.

All regions except the South - which increased by 1.4%, but is still 0.4% below January 2010 levels - posted declines in January. Sales in the Midwest declined the most, dropping by 7.3% in January alone, and are 3.2% below their level a year ago. Sales in the West declined by 5.2% in January and are down 0.9% year-over-year, while sales in the Northeast declined by 2.4% and are down 3% year-over-year.

This month's slowing sales are considered to be a slight negative for the housing market and for the underlying collateral performance of US RMBS, the agency concludes.

RMBS

Foreclosure timelines examined

Many market participants are fine-tuning their focus on the differences in foreclosure proceedings by US state (see SCI 2 March). S&P reports that although each state has its own laws for the foreclosure process, states overall can be generally categorised as being either judicial or non-judicial.

"In theory, the judicial foreclosure process is intended to protect a borrower against unlawful or unjustified foreclosure attempts by a lender. With a judicial process in place, a delinquent borrower may be in a better position to negotiate some type of mortgage restructuring or modification due to the potential length and cost of the process," says S&P analyst Zachary Wolf.

In a new report, S&P found that: foreclosure timelines are significantly shorter in non-judicial states; foreclosure timelines have increased across all states - with increases being generally greater in judicial states; and, of the loans that were in foreclosure 18 months ago, the percentage of loans from judicial states that still remain in foreclosure is nearly 3x that of loans in non-judicial states. The agency based its report on the Mortgage Bankers Association's list and used a non-judicial classification in cases where the MBA listed a state as both judicial and non-judicial.

The report also identified that between 2007 and 2010, there was no meaningful difference in the number of loan modifications entered into in judicial versus non-judicial states on an issuance-adjusted basis. Finally, loss severities were found to be generally higher in judicial states.

However, recent developments as well as continued litigation may increase foreclosure timelines and loss severities for loans in non-judicial states - somewhat narrowing the difference between the two types of states, the agency concludes.

RMBS

Mortgage portfolio analytics offered

Moody's Analytics has released its Mortgage Portfolio Analyser (MPA) service, a risk management and capital allocation tool to help retail portfolio managers analyse and manage the credit risk of their mortgage portfolios. Featuring a range of customisable models and forecasting tools, the service also gives retail credit and fixed income portfolio managers the information they need to hedge or rebalance their portfolios, the firm says.

MPA analyses newly originated, seasoned and delinquent loans, providing a single framework for analysis of all mortgage assets. It is fully integrated with Moody's Structured Finance Workstation (SFW), allowing institutions to use the same framework to analyse both the whole loan and securitised portions of their portfolios. MPA's analytic output can also be formatted for use with other waterfall and cashflow products.

The tool also includes robust simulation tools to model loan-level and portfolio-level performance as they evolve, and to project defaults, prepayments and severity dynamics. In addition, it can explicitly model the effect of mortgage insurance at the loan level, while portfolio managers can stress-test portfolios by using macroeconomic scenarios and by shocking default, prepayment and recovery rates directly.

RMBS

'Harsher' QRM definition expected

US federal agencies are preparing new risk retention requirements and a potential definition for qualified residential mortgages (QRMs). The proposal is believed to include loans with 20% or more down payments, which ABS analysts at Bank of America Merrill Lynch believe falls on the harsher side relative to a 10%-20% figure mooted anecdotally.

"We believe that more stringent definitions for what qualifies as a QRM will raise borrowing costs and tighten credit availability," they note.

Mortgages with lower down payments would be subject to the 5% risk retention requirement of the Dodd-Frank Act. Also under consideration are combined LTVs for cash-out and rate/term refinancings not exceeding 70% and 75% respectively.

Regulators have until April to finalise the details of the QRM definition, with three of the six agencies - the Fed, FDIC and OCC - apparently showing support for the proposal.

RMBS

Dutch RMBS criteria updated

Fitch has updated its rating methodology for new and existing Dutch-backed RMBS. Following the update, the agency has reviewed the outstanding ratings of existing Fitch-rated Dutch prime (non-NHG) RMBS transactions and subsequently affirmed 281 tranches, upgraded one tranche and revised eight outlooks to negative.

The main changes to the criteria include a modest decrease in the triple-A base foreclosure frequencies, a compression of foreclosure frequency rating scenario multipliers, a reduction in the quick sale adjustment (QSA), a reduction in the triple-A variable cost assumption and an extension of the default timing curves. The agency has also introduced formalised criteria with regards to set-off.

"Fitch has recently received extensive performance data from several Dutch lenders and the Stichting Waarborgfonds Eigen Woningen (WEW). It is primarily this information, combined with loan-by-loan data on several thousand foreclosed properties, from a number of key mortgage lenders, that has enabled Fitch to refine its assumptions," says Francesca Zwolinsky, Fitch director and head of Dutch RMBS.

Other changes include more conservative base-case scenario assumptions. "Whilst Dutch transactions exhibited comparatively limited performance deterioration throughout the credit crisis, Fitch expects a decline in performance, primarily driven by the effects of the government's planned austerity measures on unemployment. However, Fitch anticipates that the effect on performance will be tempered by strong social security benefits and this has been reflected in its frequency of foreclosure assumptions," Zwolinsky adds.

Loss expectations at the lower rating levels reflect the agency's near-term view and are higher than the long-term average expectations, given its perception of the Dutch mortgage market's position in the economic cycle. Consequently, this will lead to higher loss levels at lower rating categories. Higher rating scenarios are meant to be sufficiently conservative such that the realisation of these assumptions is remote, given the rating category under consideration, and can therefore be expected to be relatively constant through market cycles.

Fitch's analysis of the performance data has warranted a reduction to the triple-A base foreclosure frequencies, which together with the reduction in both the QSA and triple-A variable cost assumption will lead to moderately lower loss levels at higher rating categories.

The agency is currently finalising its revised criteria for rating transactions of Dutch mortgages backed by the Nationale Hypotheek Guarantie (NHG). This approach will be disclosed shortly, it says.