Home equity lenders, hard up for capital, issued a battery of asset- backed securities at the end of September, despite unfavorable pricing.
Several companies including Contimortgage Corp., United Companies, and Amresco Inc. issued more than $1 billion each.
Spreads widened considerably in the past month as investors chose more conservative Treasuries over asset-backed deals. That tilt meant issuers had to pay more.
But the companies "needed to securitize," said one rating agent. "They looked at all the different structures and now are finally pulling the trigger."
Home equity lenders can either securitize loans, hold them on their balance sheets, or sell them into the whole loan market. Several have said recently that they will sell whole loans exclusively, flooding the market and forcing the competition to securitize.
But some investors are seeing opportunities.
The "flight to quality" is ushering in a terrific buying opportunity, say home equity lenders and a handful of analysts.
The recent "unprecedented spread widening" has created a "historic buying opportunity," according to a recent Merrill Lynch report. The sector warrants "serious attention from value investors who can live with little liquidity," the report said.
In fact, some banks and insurance companies are more likely to consider buying the home-equity-backed securities as it becomes cheaper, said Chris Flannagan, Merrill Lynch analyst and an author of the report.
Home equity loan structures are "extremely well protected with respect to any potential deterioration in collateral performance," the Merrill Lynch report found. "On a risk-adjusted basis, subordinate home equity loans offer a very good value," it said.
But the sector should not be universally embraced, according to a Goldman Sachs report issued Friday. In fact, "investors should look before they leap," the report said. Goldman recommends that investors limit home equity loan exposure to "shorter maturity, AAA-insured transactions."
This year should prove a high-water mark for home equity issuance, the Merrill Lynch report said; issues are expected to total $78 billion. Next year's figure is likely to be lower, $65 billion to $70 billion, the report said.
Deals done at the end of September reflect the returning popularity of monoline insurance instead of a senior-subordinated structure to mitigate risk.
Analysts pointed to one deal in particular as ushering in a new way of securitizing home equity loans.
Amresco's $1 billion deal on Sept. 15 was guaranteed by Freddie Mac. Peter LeVasseur, president of Amresco Residential Mortgage Corp., said the insurance brought "execution comparable to deals we did last year" even though that market had worsened.
"We got a better execution because investors like the Freddie Mac wrap," Mr. LeVasseur said. Freddie's involvement puts an "implied government guarantee" on the deal.
And capital-starved issuers are "looking for a big provider of liquidity" like Freddie Mac, said Chris Flannagan, Merrill Lynch analyst. "This is a whole new ball game" for capital-rich entities like Freddie, he said.
In its report, Merrill Lynch divided issuers of asset-backeds into three tiers, according to availability of capital. Those that have no strategic partners and therefore depend entirely on the equity markets were at the bottom.
