US property slowdown could increase risk for CDOs

Decelerating house price inflation and competition among commercial mortgage lenders could hurt US structured credit products, according to a Dresdner Kleinwort report.

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”.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here