US CONSUMER CREDIT MARKET
Unemployment rate is currently at 9.8% (highest since 1983), up from 9.7% In August. Despite wages
and salary increased 0.2% in August from July, the wages and salary component of personal income
currently stands 5.2% below the August 2008 level.
Issuance during September amounted to USD 15 billion of new auto ABS, bringing the year-to-date
volume in this sector to USD 47.9 billion. Recent deals were dealer floorplan ABS. Demand was robust,
with oversubscribed deals pricing tighter than guidance. Spreads came in with +/- 50 bps since July
2009 on similar 2-year average life deals.
Déjà-Vu ? We see further activity in the secondary market. As for other non-mortgage consumer ABS,
high yielding asset classes are benefiting as some investors look in return for more yield in the current
Macro-economic data in September was not as good as the data of the previous months. In September,
US light vehicle sales came in at an annualized rate of 9.2 million units, down from Augusts' 14.1 million
units, due to the ending of the successful Cash for Clunkers program.
Year-to-date new issuance stands at USD 40.8 billion, with September contributing USD 7.6 billion of
non-TALF eligible volume to the deal. As liquidity returns to the market new issue spreads have come in
significantly, especially in the shorter end of the curve.
Nevertheless, data from September performance reports showed a continued credit deterioration. In the
majority of the deals we saw a rise in charge-offs versus the previous month, while we saw excess
spread levels fall below levels from the previous month, plus higher 60+ delinquency rates in
comparison with the July figures.
The Federal Reserve Board proposed a rule to amend Regulation Z "Truth in Lending Act" to implement
the 2 nd stage provisions of the Credit Card Accountability and Disclosure Act of 2009. These provisions
will protect consumers from unexpected increases to credit card interest rates, blocks lenders to issue
cards to below-21 consumers, limit fees on subprime credit cards and prohibit lenders from allocating
payments to solely maximize interest charges.
There were no new student loan ABS issued in September. The House passed the SAFRA (Student Aid
and Fiscal Responsibility Act) of 2009 and goes for approval to the Senate. The key proposal of SAFRA
is to transfer the origination of all federal student loans (FFELP) to the Direct Loan Program (DSLP) by
July 2010. Under the DSLP, loans will be funded directly by the government as opposed to banks and
other private lenders, as was the case with FFELP loans. Difference will be that the servicing of the
DSLP loans will be done not by the government, but by not-for-profit state agencies.
For private credit student loans the credit deterioration remains evident. Sallie Mae reported that for their
private credit student loan portfolio of USD 34.5 billion Q2 2009, the charge-off rate has almost tripled,
from 1.4% in Q2 2008 to 3.9% in Q2 2009. For the same period, also the 90+ delinquency rate has
tripled from 1.6% to 4.8%, knowing that Sallie Mae has tightened up lending standards for their private
credit student loan product: higher level of cosigners, average FICO from 710 to 717 and tighter
standards on their forbearance policy, which allows borrowers to temporarily defer loan payments due to
a proven economic hardship. From Q2 2008 to Q2 2009, Sallie Mae's forbearance rate declined from
12% to 6%.
Non- Agency US RMBS
There has been a strong rally across all asset types within the non-agency US RMBS, due to several
factors: greater appetite for higher yield, strong excess liquidity and positive news from the equity and
commodities markets. Point of attention remains that the rally has occurred despite continued negative
news from the 'real' economy, with weak consumer spending, due to rising unemployment, and a
continued weak housing market.
Option ARMs have recently outperformed other non-agency US RMBS, after a lag in performance over
the past couple of months in comparison with f/e Alt-As. Nevertheless, let's not get too exited. The
delinquency rate of Option ARM loans has risen significantly in September 2009 to 43%, even above the
rate of subprime loans. About 80% of Option ARM borrowers are already underwater (they owe more
than the value of their homes). More than 70% of those borrowers are in the 4 states that experienced
the worst housing recession in the US and the highest percentage of foreclosed houses: California ,
Florida , Nevada and Arizona . Furthermore another default wave is to be expected as 75% of the
Option ARM borrowers face a substantial payment shock when their interest rates recast in 2010 and
2011, especially as those borrowers have been paying so far only the minimum payment.
To help to stabilize the US housing market, the HAMP (Home Affordable Modification Program) pushed
to reduce borrowers' monthly payment. Finally in September 2009 HAMP is picking up speed in terms of
volume. According to the government reported figures lenders had offered to modify about 19% of the 3
million US home borrowers, eligible under the program. While loan modifications may help some
borrowers, statistics also show that the majority are likely to re-default within 9 months after
The more aggressive pricing criteria, plus the growing risk appetite leave no much room for error for
current investors. On top, the loan modification fueled by the government and the continued weakness
in job and housing markets, make us believe this could be a short rally.
The ABS market in Europe finally picked up the momentum of other funding markets and started to see
publicly placed new issuance during September 2009. This re-opening has come on the back of an
unprecedented market rally year-to-date and search for higher yield. There are some clear arguments
for spread consolidation: paper remains scarce, relative value in both senior and subordinated paper
and returned support in underlying markets. But we believe the recent tightening in spreads is unstable
and remains sensitive to any broader market correction.
UK housing and mortgage markets continue to improve. According to Nationwide house prices have
now recovered to the same level as 12 months ago. On the other hand, rising unemployment will likely
act as a drag on future performance and a lot of the performance today is on account of the sharp rate
cuts seen by many mortgage borrowers. The positive figures on the UK housing market must be seen
against the current exceptional rate backdrop which will not continue indefinitely. When rates would
normalize there is the risk that a large number of borrowers will be unable to service their mortgages.
We still see a weakening credit performance in Spain . Spanish RMBS reporting over the last months
mostly showed arrears rates rising, explained by the considerably greater worsening in unemployment.
Unemployment has risen from 8% to 18%.
Non call risk again reared its head in the Dutch RMBS market. Some issuer announced it would not call
its notes which were due for a call on their first optional redemption date. To date 4 out of possible 12
Dutch RMBS deals missed their first optional redemption date in 2009, though for now it seems to be
limited to sponsors who have significant government ownership stakes.