Escalating delinquency has made investors in securitized home equity loans more selective.
Panelists at a Standard & Poor's conference here said it is becoming more difficult for some issuers to sell securities.
Delinquencies in the loans underlying such securities are rising on "a fairly steep trajectory," said Christopher T. Flanagan, research director for asset-backed and mortgage-backed securities at Merrill Lynch & Co. The result has been "significant tiering" of issuers along delinquency lines, he said.
Home equity remains the largest sector of the asset-backed securities market, said investment banker Peter Rubinstein, a vice president at Chase Securities, but "if you are not a top-tier issuer you are going to have trouble selling your subordinate bonds.
"The market seems to be coming back at the AAA level. I think the better issuers are seeing the subordinate bonds sell well."
A home equity security is a "more stable product," Mr. Rubinstein said, and "investors like the predictability" because they invest with a certain time frame in mind.
But lower-credit-quality loans tend to accompany a higher rate of prepayments, though they are less interest rate sensitive, said Andrew Davidson, president of Andrew Davidson & Co., a Manhattan consulting firm that offers investment analysis, risk management, and analytical tools.
Mr. Davidson said two factors recently have hurt the market: the liquidity crisis last fall-which caused spreads to widen-and the failure of several issuers-resulting in servicing-related problems.
Home equity loan prepayments have been on the rise "because we've had a strong economy and people who have high-coupon mortgages-if their credit improves-they're able to refinance into lower-coupon mortgages," Mr. Davidson said. Most observers, he said, are expecting a slowing of prepayment speeds as competition among home equity lenders declines and interest rates hold steady.
Mr. Davidson said he expects a "universal model of prepayments" to replace an issuer model. He is now building a prepayment model, he said, for subprime and home equity securities.
"If you can capture just a few loan characteristics, you can actually develop a more generic view of prepayment patterns within the subprime mortgage sector," he said.
