Securitization Quality Declines as Wall Street Revives Issuance

The quality of commercial mortgages being packaged into bonds is declining as sales in that market soar, a Standard & Poor’s analyst said at a securitization industry conference.

“There’s some crap getting done,” David Jacob, an executive managing director at credit-rating company S&P, said today during a panel discussion at the American Securitization Forum trade group’s annual meeting in Orlando, Florida. “It’s surprising to me this early in the cycle that some of that could be happening.”

Banks and other investors seeking higher returns as the Federal Reserve restrains bond yields is fueling demand for new securitizations of various assets, said BlackRock Inc.’s J. Richard Blewitt. Issuance of securities backed by loans and leases has risen since markets froze after Lehman Brothers Holdings Inc.’s 2008 collapse.

It’s been surprising how quickly investors have returned to accepting transactions with numerous AAA rated classes, said Blewitt, co-head of securitized assets at BlackRock, the world’s largest money manager. Some bond buyers may not be scrutinizing offering documents closely enough to find “hidden” dangers, he said.

“I don’t think we’re going back to the Ponzi finance excesses that we had in 2006 and 2007 just yet, but when I get a little bit scared is when I see the old game of, ‘These are not your droids, look over there, not over here,’ " Blewitt said, referring to a scene in the original “Star Wars” movie involving a so-called Jedi Mind Trick to evade detection.

‘Feed the Beast’

Sales of commercial-mortgage backed securities will rise to $45 billion this year after banks arranged $11.5 billion of the debt in 2010, according to JPMorgan Chase & Co. Issuance plunged to $3.4 billion in 2009 compared with a record $234 billion in 2007, according to data compiled by Bloomberg.

“Commercial banks and Wall Street firms are building out platforms that will feed the beast,” said Martin Hughes, chief executive officer of Redwood Trust Inc., which in April completed the only private residential-mortgage deal in almost three years and last year began lending in the market.

The market for securities backed by automobile debt is in many ways now no different than in 2007, before the financial crisis, said Scott Krohn, director of asset-backed securities and long-term funding at Ford Motor Co.’s finance arm.

The company will probably sell $12 billion to $16 billion of the bonds this year, up from $11 billion last year, in part reflecting growing car sales as the economy strengthens, he said.

“In my estimation the auto ABS market is all the way back in terms of spreads and liquidity,” he said during the panel. “In our last transaction, we had subordinate classes that were as many as six times oversubscribed,” he said later.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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