Stricter TALF criteria shrugged off, but wider concerns remain

Stricter criteria for submitting ABS to the TALF is expected to discourage top-tier issuers from using the programme. While this in itself is unlikely to unsettle the market, concerns remain that the non-consumer ABS market is being neglected, in particular the private label RMBS sector.

The New York Fed last week announced two changes to the procedures for evaluating ABS pledged as collateral to the TALF (see last week's issue). "We do not see this [criteria] change as a significant hurdle to ABS issuers," structured credit analysts at JPMorgan confirm. "Benchmark TALF-eligible ABS issues have already been sold entirely to cash investors. This will likely lead to top-tier issuers dropping the TALF-eligible label completely from their offerings. In the off-the-run space, the data requirement should not be a big burden, but it is one more factor to consider for issuers."

They continue: "The added step should serve the purpose of weaning the non-mortgage ABS market from the TALF programme, which is reasonable at this point given the strong cash demand and improved liquidity. We expect there to be less TALF-eligible and 'TALF-able' ABS, which will keep supply scarce relative to demand."

Total issuance volumes in the US ABS market are expected to reach US$130bn this year - roughly in line with the US$140bn issued in 2008 - but sharply down from the US$750bn issued in 2006. As of September 2009, TALF has directly financed US$46bn of ABS issuances out of the approximately US$80bn of ABS eligible for TALF that has been issued since March, according to figures from the American Securitization Forum (ASF).

Some US$1.2trn in RMBS has so far been issued in 2009, compared with a year-long total of US$1.3trn in 2008 and US$2.1trn in 2006. However, in 2009 less than 1% of this has been issued without a government or GSE guarantee; this compares with private-label MBS comprising over 23% of all issuance during the time period from 1996 to 2006.

George Miller, ASF executive director, reinforced concerns about the private-label MBS sector at a hearing last week of the Senate Banking, Housing and Urban Affairs Subcommittee on Securities, Insurance and Investment. "While there have been signs of recovery in certain parts of the securitisation market throughout the first three calendar quarters of 2009, some market segments - most notably, private-label RMBS - remain dormant, with other securitisation asset classes and market sectors remaining significantly challenged," he said.

"Furthermore, private-label MBS transactions that have occurred in 2009 involved pools of seasoned, conforming loans - no major private-label residential mortgage-backed securities deal of which we are aware has directly financed new mortgage loan origination this year."

Miller noted that the subordinate ABS markets are still relatively dormant and, unless banks are able to finance a greater portion of the capital structure, credit origination via securitisation cannot be fully restored. "Notwithstanding the success of the TALF programme and the restoration of a modest degree of securitisation financing and liquidity in some market segments, significant challenges remain, including establishing a stable, sustainable and broad-based platform for future securitisation market issuance and investment activity that is less reliant on direct government support," he concluded.

AC