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ABS Spotlight Summary - March 20, 2018

Core Content

This issue of ABS Spotlight provides an overview of the structured finance market, focusing on asset-backed securities (ABS), residential mortgage-backed securities (RMBS), credit card ABS, and the impact of policy changes on these sectors. It also includes analysis of the credit impact of the 2017 hurricanes and the PACE ABS market, along with performance updates and rating actions.

Main Points

Market Outlook and Trends

• Securitization Demand: Conference attendees expect continued strong demand for securitized products. They do not anticipate significant concerns over collateral credit quality or securitization structures to impact investment decisions.
• CLOs: Collateralized loan obligations (CLOs) are expected to maintain robust issuance, even as spreads decline. However, some market participants are concerned about the loosening of transaction structures, which could increase certain risks.
• RMBS: US residential mortgage-backed securities (RMBS) are expected to see significant growth, driven by the resumption of securitizations of home equity lines of credit (HELOCs) and closed-end second mortgages. Other subsectors, such as re-performing mortgages and mortgage-servicing rights (MSRs), are also likely to grow.
• ABS Issuers: There is an expectation that the growing number of ABS issuers will continue to expand. Traditional issuers are seeing steady activity, while some commercial ABS sectors, like container leasing, are recovering after challenges.
• Auto and Equipment Loans: Auto lenders have tightened credit slightly over the past year, and equipment lease ABS is expected to benefit from increased demand. However, concerns about mid-life aircraft collateral in the aircraft leasing sector persist.

Policy and Legal Issues

• LIBOR Transition: The end of LIBOR in 2021 is expected to pose challenges for the securitization market. Some transactions have not adequately addressed this transition, which could lead to litigation.
• Tax Reform Impact: The 2017 US tax law is largely credit neutral for residential mortgage loans but is a modest credit positive for non-mortgage consumer loans like credit cards and auto loans. However, weakened underwriting standards may lead to continued performance weakening.
• Canadian Consumer Lending: Canadian banks face increasing vulnerability in consumer lending due to rising debt-servicing costs, longer auto loan terms, and a higher proportion of uninsured mortgages. Credit card portfolios, though small, are performing well despite increased delinquencies.

Hurricane Impact on Credit

• Credit Impact: The credit impact of the 2017 hurricanes on securitizations remains limited due to servicer relief efforts, insurance coverage, and structural features. The largest impact was observed in Fannie Mae and Freddie Mac credit-risk transfer (CRT) deals, where delinquencies rose significantly in hurricane-affected areas.
• Auto and Student Loan ABS: These ABS were affected by a brief spike in extensions and forbearance but have since stabilized. Delinquency rates and charge-offs for credit cards increased slightly in January, but remained below historical averages.

Key Information

Performance Highlights

• Canadian Credit Cards:
  • Net charge-off rate dropped to 3.06% in January, a 25 bps decrease from the previous year.
  • Delinquency rate increased slightly to 2.37%.
  • Payment rate improved to 46.31%, up from 43.51% in January 2017.
  • Average yield increased to 23.33%, and excess spread was 19.01%.
• ABS Surveillance Update (February 2018):
  • Upgrades and downgrades were recorded across various sectors.
  • Auto ABS had the most upgrades, while student loan ABS had the most downgrades.
  • Rating transitions indicate a shift in credit quality across different tranches.

Rating Actions

• Upgrades:
  • USAA, GM Financial, E*Trade RV and Marine Trust, and Ford Credit received upgrades for their auto loan ABS.
• Downgrades:
  • Certificates from Patrons' Legacy 2003-IV and Lehman Brothers small balance commercial loan ABS were downgraded.

Conclusion

The structured finance market remains resilient, with continued demand for securitized products. Policy changes, including the tax law and potential LIBOR transition, are expected to have limited credit impact. The credit card and auto loan ABS sectors in Canada show strong performance, while PACE ABS market uncertainty is expected to decline with the potential rollback of Dodd-Frank regulations. Overall, the market is adapting to these changes, though some risks and challenges remain.