Home-equity loan issuers, including People's Choice and Saxon Mortgage, are looking at buying protection on the new synthetic sub-prime residential mortgage-backed securities index to hedge securitizing costs and basis risk. Only a handful of traditional issuers have used the ABX since its launch Jan. 19, but dealers and lawyers across the Street said they are seeing growing interest. "It makes all the sense in the world," said Tim Hoffman, senior v.p. in capital markets at Saxon Mortgage in Richmond, Va.David Zimmer, executive v.p. of asset management at People's Choice in New Jersey, said, "We have not written a contract yet, but we will in 2006, without a doubt."
The move is being led by hedging activity from dealer origination desks, which has added greater depth and liquidity. The ABX until recently was skewed by hedge funds, collateralized debt obligation managers and other protection sellers (DW, 3/31).
Hoffman, Zimmer and other traditional issuers said their delayed entry has more has to do with timing than concerns about the index. "We just have a lot of irons in the fire," Hoffman said. Other originators cited more technical concerns. "[The market] is not extremely large or liquid," said Matt Miller, senior v.p. in home-equity whole-loan trading and primary issuance at Lehman Brothers in New York, at an American Securitization Forum event last week. "I wish there were more names," he added, noting he will watch the first roll carefully. Smaller firms expressed concerns with the index being new and un-established. They also pointed to long approval processes and hedging expenses.
"The fact that this tool exists and that you can easily use it to hedge pipelines and lock in spreads, it's only natural to at least test the waters, to look at, understand and model it," said Stuart Lippman, director in ABS trading at UBS in New York. "I think we're in that stage of the market right now. Over the course of time, it will become a more common tool for hedging pipeline risk."
