--By Hillary Jackson
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| Mahesh Kotecha |
The residential mortgage-backed securities and collateralized debt obligation markets are unlikely to rebound in 2009, predicts Mahesh Kotecha, president of New York-based Structured Credit International Corp. After watching the MBS market drop from more than $2 trillion in 2006 to $1.4 trillion this year, he expects performance in 2009 to be similar to that of 2008. "My guess is that [the market] won't see the light of day anytime soon," he says. That said, Kotecha's outlook changes daily as the financial turmoil gripping Wall Street and global securities markets continues to unfold. The U.S. Congress in early October approved a $700 billion bailout package for the financial industry, which the government hopes will stabilize domestic and global markets and restore confidence following the subprime lending crisis and failure of several prominent investment and commercial banks and other institutions.
"We're in the midst of a financial crisis, so the story is changing every day. The mortgage market is what this crisis started with and is the center of it," Kotecha says.
Going forward, Kotecha is focused on determining where the market stands in terms of delinquencies and losses on mortgages, unloading inventory in the housing market, price depreciation, and where the bottom to this market might be. Much of this will be determined by how the Treasury implements its $700 billion rescue package and whether it does, indeed, lead to a recovery of the mortgage market, he says.
When the Treasury enters the market, prices may move, Kotecha says, noting that some say as much as $300 billion in investment dollars is sitting on the sidelines waiting for an opportunity to get into the market. "I don't believe it's that much, but some money may move out of the woodwork as well [following the Treasury's action]," he says, predicting the actions of the market will depend on potential returns on distressed assets, transparency, pricing and disclosure issues.
New York law firm Katten Muchin Rosenman LLP maintains that as the housing and subprime lending meltdown and resulting credit crisis continue to develop, they present significant challenges and opportunities. With analysts estimating eventual write-downs of affected investments in the $1 trillion range, some suggest possible losses as high as $2 trillion.
Along with the rest of the market, Katten Muchin Rosenman partner Eric Adams is watching the Treasury to see how its actions will affect the market, focusing particularly on who is buying and selling distressed assets, potential litigation and restructurings. Opportunity funds are being watched closely, as are the restructurings of CDOs and RMBS deals, he says. Adams is co-chairman of Katten Muchin Rosenman's Troubled Asset Relief Program (TARP) Task Force, and notes the Treasury's bailout package is unprecedented in both size and scope, and will have "wide-ranging" economic and legal ramifications. "In this environment, the sky's the limit," he says. "This is the largest crisis of my lifetime."