Two from the Vaults

The Wall Street mortgage bond issues that surfaced in recent weeks are like a K-Tel oldies compilation — full of material that is said to have aged well.

As with the record albums that K-Tel advertised on television, it remains to be seen whether the packages from Citigroup Inc. and American General Finance Corp. will do anything to revive the originators' careers.

On Monday, DBRS Ltd. said that last month it had rated Citi's $155 million deal, which the rating agency said was the first such deal since October. DBRS also said it had been asked to evaluate a number of other mortgage pools in the past few weeks.

Last week American General said it expects to raise $925 million to $975 million by issuing mortgage bonds with a principal balance of $1.6 billion in a private transaction. The lender, a unit of the fallen financial conglomerate American International Group Inc., said it will retain some of the bonds.

In both deals, the underlying loans have been sitting on the issuer's balance sheet for some time. DBRS said the Citi pool is made up of mortgages that were originated more than six years ago on average. The Wall Street Journal, citing a source it did not identify, said the American General loans "are about four years old or more."

During the housing boom, investment banks and subprime lenders regularly issued bonds backed by mortgages that they had just made or had recently bought from others. The spectacular bust in these private-label bonds — so called because they did not carry federal guarantees — helped cause the current recession and gave Fannie Mae, Freddie Mac and the Government National Mortgage Association nearly exclusive dominion over mortgage bond issuance last year.

Scott Buchta, a strategist at Guggenheim Capital Markets LLC in Chicago, told Bloomberg News that because of the age of the loans, the Citi deal is only a "baby step" toward reviving the private-label market.

"When we see a syndicated deal backed by new production loans then we will know that the securitization markets are on the mend," he said.

Quincy Tang, a senior vice president at DBRS, told American Banker that securitizing newly issued loans may "not make economic sense" for issuers right now, because of the stiff ratings criteria — such as the requirement that the top-rated bonds in a deal have large loss cushions. A big factor behind those criteria is the projection that home prices will continue to fall. Seasoned loans, on the other hand, have established payment histories, which provide signposts for future performance.

DBRS said the pools presented to it recently have included prime and subprime loans originated one month to eight years ago (the average age is two to three years). But out of the 12 requests DBRS received, only two pools were made up of newly originated loans.

The loans in the 12 pools also boast conservative loan-to-value ratios of 50% to 60%. DBRS said it expects to rate another securitization of seasoned collateral this month.

American General said it will use the proceeds from its bond issue to "support its liquidity position and funding needs," including paying off $313 million of debt due this year.

Citi would not discuss its transaction. Tang said the deal's collateral is strong and "there has been some investor interest."

Tom Deutsch, the deputy executive director of the American Securitization Forum, a trade group, said at a panel discussion in New York last week that it could take until next year before there is appreciable issuance of bonds backed by newly originated mortgages without government guarantees.

Storied Digs

Down the hall from a room where subprime mortgages once were manufactured, Rick Gibson spends his days trying to fix them.

His Gibson Law PC has been adding administrative staff to handle the unending phone calls and "bureaucratic busy work" involved in negotiating loan modifications from servicers. So the firm recently expanded its office, and now occupies half a floor of a Woodland Hills, Calif., building.

The other half, which has been vacant for two years, once belonged to Option One Mortgage Corp. — the subprime lender that H&R Block Inc. shuttered in December 2007.

"They changed the sign on the door from ‘loan origination' to ‘loan modification,' " Gibson joked.

Card Catharsis

Loss rates are accelerating across the credit card industry, but going into runoff mode has propelled Advanta Corp. well ahead of the pack.

The Spring House, Pa., company, which stopped lending on its one million small-business accounts in May, said Tuesday that the default rate on its remaining accounts more than doubled from May, to — wait for it — 56.95% last month.

Advanta, which began laying off half its work force on July 6, also said Tuesday it had expedited the recognition of losses "as a result of closing customer accounts to future use." It now writes loans off as uncollectible after 120 days of delinquency rather than 180 days.

By Harry Terris, Kate Berry and Maria Aspan


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