2011 UNC Banking Institute
The Future of Securitization
Vicki Tucker
Hunton & Williams LLP,
Moderator
Brad Brown
Bank of America Merrill Lynch
Tom Deutsch
American Securitization Forum, Inc.
Hank LaBrun
Cadwalader, Wickersham & Taft LLP
Structured Finance Overview
March 2011
These materials have been prepared by Merrill Lynch, Pierce, Fenner & Smith Incorporated and should
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not soliciting any action based on these materials. These materials are confidential and contain
confidential information, and should not be copied, summarized or disseminated in any form to any
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The improper dissemination of these materials may result in violation of the federal securities laws.
ABS Market Update
ABS Market Update
Key Takeaways from February 2011 Issuance
2007


2008
2009
2010
Sector ($BN)
Volume
∆ vs. '06
Volume
∆ vs. '07
Volume
∆ vs. '08
Volume
∆ vs. '09
Automobiles
Credit Cards
Equipment
Student Loans
Other
Total
$75.6
$95.7
$6.9
$62.7
$21.3
$262.2
-17%
50%
-27%
-20%
-19%
-2%
$38.0
$63.4
$2.7
$28.9
$2.0
$134.9
-50%
-34%
-61%
-54%
-91%
-49%
$60.3
$75.9
$9.0
$23.6
$10.5
$179.3
59%
20%
233%
-18%
432%
33%
$59.4
$6.6
$7.8
$17.4
$11.3
$102.4
-2%
-91%
-14%
-26%
7%
-43%
2011YTD
2011 Proj.
Volume
Volume
$11.8
$1.7
$1.6
$1.4
$1.1
$17.6
$65.0
$15.0
$10.0
$20.0
$10.0
$120.0
For 2011 February month-end, over $17B in ABS issuance has been offered to the market through 26 deals

Issuance volume remains steady compared to 2010 and is flat year over year

The ASF Conference in early February teed up a flurry of issuance that was generally well received by investors
The majority of the volume year-to-date was in the auto sector and spanned prime, subprime and dealer floorplan issuances

Captive finance companies have increasingly represented a greater portion of ABS volume as banks rely more on deposits
to fund their consumer lending businesses

Mercedes-Benz issued their inaugural auto lease ABS issuance from their newly created MBALT platform

Investors continue to search for yield with strong demand for esoteric /off-the-run transactions and subordinate paper
1
ABS Market Update
Spreads Continue to Hover ~30bps Wider than 2006 Levels
New Issue Volume
($MM)
Spread
(bps)
TALF
32,000
700
28,000
600
24,000
500
20,000
400
16,000
300
12,000
200
SL:
1bps
8,000
100
SL:
39bps
CC:
2bps
4,000
0
CC:
30bps
Spreads as
of 1/6/06
Auto:
2bps
0
-100
2006
2007
Volume
2008
2009
3-year AAA Fixed Auto
3-yr AAA Fixed CC
Issuance data as of February 28, 2011
2
2010
2011YTD
3-yr AAA Flt FFELP SL
Spreads as
of 3/3/11
Auto:
33bps
ABS Market Update
Select ABS Outstandings
800
Decreased credit card
issuance is expected to
continue throughout 2011
due to recent regulatory
changes
Auto
$BN
Credit Card
Student Loan
700
600
202
234
244
249
500
400
301
300
332
314
294
200
195
100
251
248
207
191
133
144
137
128
129
2007
2008
2009
2010
2011YTD
0
2006
Negative Net Supply Continues to Create Demand for ABS Product
$BN
250
232
223
182
200
183
182
136
150
$BN
60
189
135
157
40
0
50
17
(20)
30
2008
2009
2010
Amortized
Issued
Amortized
Issued
Amortized
Issued
Amortized
Issued
Amortized
Amortized
Issued
Issued
2007
(13)
(22)
(40)
0
2006
50
20
102
100
41
(40)
(47)
(60)
(80)
(87)
(100)
2006
2011YTD
____________________
Data as of February 28, 2011. (1) Source: BofA Merrill Lynch
3
2007
2008
2009
2010
2011YTD
2011E
RMBS Market Update
RMBS Market Update
Overview


Macroeconomic environment continues to remain stressed, with indicators giving mixed signals

Home prices continue to decline

Initial unemployment claims starting to improve

Consumer confidence still fragile
Total consumer debt continues to decrease across asset classes


Challenging environment for mortgage companies



Driven by continued delevering by consumers
Origination volumes continue to decline with conforming loans representing 91% of total YTD 2010
originations
Follow-on impact to servicing balances
Continued uncertainty regarding GSE reform and regulatory oversight

Foreclosure crisis likely to drive additional scrutiny and pressure for mortgage servicers
____________________
Source: BofA Merrill Lynch
5
RMBS Market Update
Historical Non-Agency Prices
Annual Non-Agency Issuance
($B)
100
1,400
Subprime
Alt-A
Jumbo
90
Option ARM
1,200
ReREMIC
Reperforming
80
FHA/VA Reperforming
1,000
70
800
60
600
50
40
400
30
200
20
Jun-08
Feb-09
Oct-09
Jun-10
Fixed Rate 2006 Snr PT P
5/1 WAC 2006 SSnr
Fixed Rate 2006 SSnr
Option ARM 2006 SSnr
Feb-11
0
2000
____________________
Source: BofA Merrill Lynch
6
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
RMBS Market Update
Historical Mortgage Origination Volume and Rates
Mortgage Originations Continue to Decline as Demand for Refinancing Falters
($ in trillions)
$4.5
9.0%
4.5%
Spread (bps)
Current
Average
$3.9
4.0
7.5
4.0
82
49
3.5
3.5
$2.9
6.0
3.0
$3.1
3.0
72.0%
2.5
4.5
$2.2
2.5
$2.4
$2.9
51.7%
63.1%
2.0
$3.0
4.4%
50.5%
49.0%
2.0
$1.8
3.5%
51.9%
3.0
1.5
$1.5
58.6%
1.5
$1.2
$1.0
1.0
1.5
$1.4
$1.3
50.6%
69.0%
53.1%
43.9%
51.0%
49.5%
$1.0
65.7%
48.1%
46.9%
56.1%
41.4%
1999
2000
2001
36.9%
73.9%
28.0%
49.4%
31.0%
1.0
37.1%
48.3%
0.5
26.1%
0.5
62.9%
34.3%
0.0
0.0
2002
Purchase Originations
2003
2004
Refi. Originations
2005
2006
2007
2008
30-Year Conforming Mortgage Rate
____________________
Source: BofA Merrill Lynch
8
2009
2010E
Freddie Mac MBS Rate
2011E
2012E
RMBS Market Update
Historical Sub-Prime Residential Mortgage Originations
Industry Sub-Prime Originations Still Near Zero
($B)
Y-o-Y
Change
Prime
SubPrime
---
30.7%
25.0%
35.4%
55.0%
(34.3%)
71.0%
4.4%
17.9%
(4.6%)
(4.0%)
____________________
Source: BofA Merrill Lynch
9
(5.9%)
(68.2%)
(34.7%)
(87.9%)
22.6%
(82.6%)
(34.3%)
0.0%
RMBS Market Update
Jumbo Product Starting to Grow & Could Be a Bright Spot
Jumbo Production ($B)
Top 10 Non-Agency Jumbo Originators
2010
$60
Rank
$52.6 $53.0
$48.2
50
$21
40
$39.0
$38.4
$40.0
$19
$30
$31.4
$29.6
$15
$18
$22
$20
20
$11
$39
$28
$32
$29
$23
10
$19
$14
Volume ($bn)
Market
Share
$6.7
20.2%
1
Bank of America Home Loans
2
Wells Fargo & Company
5.7
17.3
3
Chase
3.2
9.7
4
PHH Mortgage
3.2
9.6
5
Citi
2.1
6.4
6
SunTrust Mortgage
1.9
5.8
7
ING Bank
1.8
5.3
8
US Bank Home Mortgage
1.4
4.2
9
Flagstar Bank
0.9
2.7
10
Sovereign Bank
0.8
2.3
$37.3
$33.5
30
Name
1H
$22
$22
$16
Total Top 10
$27.5
83.4%
$3
0
Rest of Market
5.5
16.6
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
Total Non-Agency Jumbo
Agency Jumbo
Non-Agency Jumbo
____________________
Source: BofA Merrill Lynch
10
$33.0
100.0%
CMBS Market Update
CMBS Market Update
Generic CMBS Spreads to LIBOR
CMBS Issuance Volume
10,000
350
($B)
Conduit
Floater
9,000
SnglAsset/Borr
300
International
8,000
Agency
Other
7,000
250
6,000
200
5,000
4,000
150
3,000
100
2,000
1,000
50
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11
30% Super
AA
BBB Minus
20% Mezz AAA
A
0
10yr CMBS Jr
BBB
2000
____________________
Source: BofA Merrill Lynch
12
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
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2011 UNC Banking Institute
“Alchemy of Securitization
Policy Reforms”
Tom Deutsch
Executive Director
American Securitization Forum
Thursday, March 31, 2011
Key Securitization Policy
Reform Initiatives
►
►
►
►
GSE Reforms
Mortgage Servicing, AG Settlements, HAMP, etc.
FAS 166/167 & Risk Based Capital Rules
Implementation of Dodd-Frank Act including:
►
►
►
►
►
►
►
►
►
►
►
►
►
Risk Retention, including definition of ‘Qualified Residential Mortgage’ (QRM)-March 29 FDIC Board Meeting
April 14, 2011 HFSC Hearing
Loan-level data requirements—Reg AB II
Conflict of Interest Provisions
Due Diligence Requirements
Reps and Warranties/Repurchases
Covered Bonds Legislation
Basel III
ANPR re Alternatives to NRSRO Ratings in Regulatory Capital Rules
NRSRO Expert Liability (Repeal of Rule 436(g))
SEC’s Regulation AB II Proposals
FDIC Final Securitization Safe Harbor Rules
FDIC Orderly Liquidation Authority (OLA) Powers
17
2011 UNC Banking Institute
The Future of Securitization
Proposed Regulation AB Enhancements
Adopted Exchange Act/Dodd-Frank/Reg AB Examples
March 31, 2011
22440348
Proposed Regulation AB Enhancements
PROPOSED REGULATION AB ENHANCEMENTS
Proposed Regulation AB Enhancements
•
Offering Process Changes
•
New Disclosure Requirements
•
Additional Ongoing Reporting Requirements
•
Private Offering Safe Harbor Revisions
Proposed Regulation AB Enhancements
Offering Process Changes
•
New Shelf Eligibility Criteria
•
•
•
•
5% Risk Retention
Depositor CEO Certification
Repurchase Obligations Opinions
Perpetual Reporting
•
Preliminary Prospectuses Required; Delivery Deadline
and Waiting Period
•
New Forms; Unified Disclosure Document
Proposed Regulation AB Enhancements
New Disclosure Requirements
•
Waterfall Computer Program
•
Specified Asset-Level Disclosure
Proposed Regulation AB Enhancements
Ongoing Reporting Requirements
•
No More “De-Listing”
•
Ongoing Asset Performance Information
•
Ongoing Certifications
Proposed Regulation AB Enhancements
Private Offering Safe Harbor Revisions
•
144A and Reg. D
•
Enhanced Information Requirements
•
“Structured Finance Products”
•
Form 144A-SF
Adopted Examples
ADOPTED
EXCHANGE ACT/DODD-FRANK/REG AB
EXAMPLES
Rating Agency Information
Representations and Warranties
Diligence and Disclosure
Rating Agency Information
Rating Agency Information
Rating Agency Information
Rule 17g-5
•
Arranger
•
Password Protected Website
•
Initial Credit Rating and Ongoing
Surveillance
Rating Agency Information
Dodd-Frank Subtitle C
•
Internal Controls
•
Conflicts of Interest
•
SEC Oversight
•
Transparency (basis, methodology)
•
Private Right of Action
•
Rescission of Rule 436(g)
Rating Agency Information
Practical Concerns
•
Increased Liability Concerns
•
Highly Structured Communications
Representations and Warranties
Representations and Warranties
Representations and Warranties
Dodd-Frank 943(1)
NRSRO must include a description in any ratings report,
(A) the representations, warranties and enforcement mechanisms
available to investors, and
(B) how they differ from issuances of similar securities.
Representations and Warranties
Dodd-Frank 943(2)
Any securitizer must disclose fulfilled and
unfulfilled repurchase requests across all trusts
aggregated by the securitizer, so that investors may
identify asset originators with clear underwriting
deficiencies.
Representations and Warranties
Rule 15Ga-1
•
•
•
Disclose Preceding 3 Years of Rep/Warranty
Repurchase History
Across All Trusts Aggregated by “Securitizer”
On New Form ABS 15-G
• Initial Filing (3-year look back)
•
Quarterly Filings (Quarter only)
Representations and Warranties
Changes to Regulation AB Sections 1104 and 1121
1104 (Sponsor Information)
•
3 years of repurchase history in Prospectus
•
For relevant asset class only
•
Registered or unregistered transactions
•
No materiality threshold
1121 (Monthly Reports on 10-D)
•
Pool information in 15Ga-1 format
•
No materiality threshold
•
For deal assets only
•
For period covered by 10-D only
Representations and Warranties
Form ABS-15G
•
Organized by
Asset Class
- Issuing Entity
- Originator
•
Subject to demand
•
Repurchased or replaced
•
“Pending”
•
“In Dispute”
•
“Withdrawn
•
“Rejected”
Representations and Warranties
•
Obligates “Securitizer”
•
•
•
Depositor
Sponsor
All Trusts with Repurchase Obligations
•
•
Any Asset Class
Public or Private
Representations and Warranties
Practical Concerns
•
Lines of Communication/Contractual
Arrangements
•
Data Tracking and Relevance
Due Diligence and Disclosure
Due Diligence and Disclosure
Due Diligence and Disclosure
Rule 193
•
Public Offerings
•
Requires a Diligence Review
•
“Reasonable Assurance”
•
Third Party Reviews (attributed/not attributed)
Due Diligence and Disclosure
1111(a)(7)
•
•
Nature of Review
Findings and Conclusions
1111(a)(8)
•
Deviations from Disclosed Underwriting Criteria
Nature of Deviations
Data and Characteristics
Identity of Entity
Deciding to Include
Factors
Data on Meeting
Compensating Factors
Due Diligence and Disclosure
Practical Concerns
•
Scope of Review
•
Liability Concerns
•
Coordination with Other Requirements
•
Private Offering Requirements To Come