Mortgage originators are increasingly using third-party wraps on deals that are standalone triple-As. The insurance is being used to attract investors to a market that is already saturated with paper and is bracing for a less-favorable, higher-rate backdrop. Investors predict the trend will increase in popularity throughout the year.
Option One Mortgage and Ameriquest Mortgage are among the issuers that are selling deals with the participation of monoline insurers even though the deals have a so-called shadow rating without the wraps, according to rating agency officials. Monolines are usually used only when a deal cannot achieve a triple-A rating without their involvement and asset-backed veterans said it is rare to see them involved otherwise.
"We're certainly hearing talk about exposure concerns in the market," said Gyan Sinha, senior managing director and head of ABS research at Bear Stearns. He added: "I don't think there's any fundamental credit risk, or downgrade risk," noting that even without these risks present, some investment parameters may require concentration limits. He called it a belt-and-suspenders approach.
However, one veteran investor, who participated in a recent Ambac Assurance-wrapped deal for Option One, said the presence of wraps on triple-A paper may be an ominous sign. "It suggests you are not buying a triple-A piece of paper; either the collateral is shaky or the rating agencies are." The trend reminds him of the use of wraps on franchise loan-backed deals before the sector blew up. "That paper will trade at par today, whereas unwrapped triple-As are trading 5-10 points cheaper even if they have not been downgraded," he said. He stressed there are no indications to compare the sub-prime market to the franchise market but that the mortgage market in general will face a more challenging environment in the coming years.
Officials from the issuers did not return calls by press time in a holiday shortened week. Iain Bruce, managing director at Ambac, also did not return calls.
By using wraps, issuers can attract investors who may have reached concentration limits on a given name. This is particularly important in the sub-prime mortgage market, where the big three--Ameriquest, Option One and New Century Financial--have originated the bulk of new loans reaching the securitization market. Furthermore, using a monoline opens up the deals to new investors.
