US property slowdown could increase risk for CDOs
20 Feb 2007, Mark Pengelly, Risk magazine
The bank's analysts noted losses on home equity loans had increased in the past two years, partly due to slowing US house-price inflation. Such loans typically make up more than 50% of assets in US high-grade collateralised debt obligations (CDOs) of asset-backed securities (ABS), and more than 60% in US mezzanine CDOs of ABS. The report said increasing spreads on home equity loans meant mezzanine deals, in particular, could be repriced. Spreads of BBB(minus) and BBB-rated loans have widened sharply in the last month, from 200-300 basis points to 400-600bp for BBB, and from 300-400bp to 600-900bp for BBB(minus), according to Dresdner Kleinwort's research.
In the commercial sector, the report marked a 58% increase in volumes of US commercial real estate CDOs in 2006, to $33 billion. This was fuelled by high investor demand for the deals, coupled with a healthy underlying market for both commercial property and commercial mortgage-backed securities. But the report also encouraged investor diligence, citing competition among lenders in the commercial mortgage sector that could produce “weaker underwriting standards”.