Accusations that sub-prime lender Ameriquest Mortgage uses "Boiler Room"-type origination practices have reignited concerns about whether some of the most frequent bond issuers are sacrificing lending standards for the sake of keeping origination levels up as rates move higher.
The allegations against Ameriquest, which was one of the market's most prolific issuers with roughly $53 billion in asset-backed sales last year, were contained in a Los Angeles Times article published at the beginning of the month. And they were the talk of the town at last week's mammoth ABS West conference in Phoenix, with investors and sell-siders saying the article was a lightening rod for the debate on to what extent aggressive underwriting tactics could hurt cash flows backing the sub-prime bond market.
"These guys have to keep the machine going and there's no question quality is going to slip. But it's nothing the market has not already thought about; there are no bad bonds, just bad prices," said one trader.
Given most of the market shut down last week because of the conference, spreads on Ameriquest bonds and default protection did not budge. But market participants say the true test of how the market reacts will come this week once bond market participants are back at work because Ameriquest is a private company. "It's an interesting read and has stirred up a lot of talk," said one investor, who reported hearing default swaps on Ameriquest protection referenced to specific bonds quoted 50 basis points wider last week. A trader, however, could not confirm this and said another investor actually sold protection on Ameriquest last week to try and front-run any negative reaction this week.
An Ameriquest spokesman said issues raised in the article are not systemic. "We have procedures and internal controls in place that are designed to ensure that underwriting standards, pricing policies and property valuations are fair and accurate," he said.
Bond market professionals also say there has long been speculation Ameriquest has been originating high volumes to prepare for an initial public offering and note the article could delay any such plan.
