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U.S. ABS Update Federal Reserve Bank of Richmond 2013 Credit Markets Symposium “Finding the Right Balance” Kevin Duignan, Managing Director Head of Global.

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Presentation on theme: "U.S. ABS Update Federal Reserve Bank of Richmond 2013 Credit Markets Symposium “Finding the Right Balance” Kevin Duignan, Managing Director Head of Global."— Presentation transcript:

1 U.S. ABS Update Federal Reserve Bank of Richmond 2013 Credit Markets Symposium “Finding the Right Balance” Kevin Duignan, Managing Director Head of Global Structured Finance and Covered Bonds April 18, 2013

2 1 Putting Structured Finance Performance in Perspective US Structured Finance Losses ( Issuance) Note: Numbers may not add due to rounding ABSCMBSRMBSSCUS SF Original balance (USDbn)1, , ,494.5 Performance by original balance (%) Repaid No loss expected Loss expected Loss realized Total realized and expected losses by rating category, by original balance (%) ‘AAAsf’ Other investment grade Speculative grade All ratings Source: FitchRatings – Data represents Fitch rated transactions only

3 2 U.S. Structured Finance Overview Consumer ABS performance was generally solid through the crisis and has been stellar post-crisis Credit Card and Auto Loan ABS performance at or near all time best Surprisingly performance seems immune to weak labor market conditions We expect Credit Card and Auto ABS performance to remain strong, even if underlying economic fundamentals deteriorate Hyper-competition in subprime auto is a concern Pre-crisis Private Student Loan transactions were weak but recent vintage deals are much stronger CLO’s demonstrated their resilience through the credit crisis and Fitch expects issuance to continue to accelerate and strong performance to continue The CMBS sector continues its recovery but market conditions are getting heated Deterioration in underwriting quality a concern The Private Label RMBS market is beginning to show signs of life Collateral quality for new transactions is extremely strong

4 3 US ABS Issuance – Subprime Goes, Auto Arrives Source: JP Morgan

5 4 Why is US Consumer ABS performing so well? Despite lingering pressures on the economy, and instability due to debt ceiling uncertainty, ratings for most ABS sectors have been and are expected to remain stable over time. Reasons for this include: Strong collateral credit quality Significant performance improvements since peak losses Conservative base cases derived through prior recessionary environments Consistent structures that de-lever rapidly Plain vanilla collateral Skin in the game for issuers, few originate to sell platforms Stable credit enhancement levels Relatively low loan payments for borrowers Strongest performing sectors – Autos, Credit Cards Weaker sectors – Private Student Loans

6 5 Consumer ABS Delinquency Performance ABS Sector Continues to Produce Stable Performance a in Difficult Environment Consumer ABS 60+ Day Delinquencies

7 6 Auto Loan ABS 60+ Days Delinquency Performance Prime and Subprime 60+ Delinquencies

8 7 Wide CNL Performance Disparity Exists in Subprime Market Sample summary of shelf performance, averaged Source: Fitch Ratings, Intex

9 8 The List of Subprime Auto Issuers has Grown Rapidly Ally Financial * GM Financial (f/k/a AmeriCredit) American Credit Acceptance * Capital One CarFinance Capital CarNow Acceptance CitiFinancial Auto Issuance Trust (Acquired by SCUSA) Consumer Portfolio Services (CPS) Credit Acceptance DriveTime Exeter Finance First Investors (Acquired by Aquiline) Flagship Credit Acceptance Franklin Capital (Acquired by SCUSA) * Household Automotive Credit (HSBC; Acquired by SCUSA) Long Beach Acceptance Pinnacle Capital Prestige Financial Services Santander (SCUSA – f/k/a Drive Financial) Security National Automotive (SNAAC) Tidewater * Triad Financial (Acquired by SCUSA) United Auto Credit (UPFC; Acquired by SCUSA) * Wachovia (Wells Fargo) Westlake Financial Services *Fitch Ratings rated transactions

10 9 Fitch Credit Card Indices and U.S. Employment Situation

11 10 Personal Bankruptcy Filings Continue to Fall

12 11 Student Loan ABS FFELP ABS FFELP loan performance and transaction ratings expected to remain stable for the majority of the sector given the U.S. government guarantee on collateral. All ‘AAAsf’ bonds have a negative rating outlooks commensurate with the US sovereign rating. Fitch is monitoring operational risk due to issuer and servicer consolidation resulting from the discontinuation of FFELP. Basis risk has subsided. Private Student Loan ABS Private student loan collateral performance is expected to remain pressured. Trust performance and downgrades will vary widely by issuer and structure: Transactions structured before the crisis are more likely to be stressed due to looser underwriting and tighter structuring. Hearings were held in March 2012 to discuss legislation regarding dischargeability of private student loans in bankruptcy. (S “Fairness for Struggling Students Act”).

13 12 Private Student Loan Vintage Losses on the Rise

14 13 Equipment Lease/Loan ABS Stable Asset Performance Expected for 2013

15 14 Timeshare ABS Overall performance better than expected Fitch Timeshare ABS Delinquency and Default Index

16 15 US RMBS Market Update Government Financing 90% of New Mortgage Originations High Conforming Loan LimitsMortgage Originations by Product ($BN) Source: Fitch Ratings, Inside Mortgage Finance

17 16 US RMBS Market Update RMBS Market Still Facing Slow Recovery… MBS Issuance Activity ($Bil)RMBS Eligible Loan Production ($Bil) Source: Fitch Ratings, Inside Mortgage Finance

18 17 US RMBS Market Update Factors Weighing on RMBS Market’s Restart? Limited GSE Reform. High loan limits. Below market g-fees. Both weighing on loan production for RMBS Strong bank portfolio bid Cost of funds advantage Attractive low-risk assets Rising rates a key risk – may cause strategy shift Open regulatory rules Qualified mortgage Risk retention rules Basel III Source: Fitch Ratings, Inside MBS & ABS Qualified Mortgage and Ability to Repay Rule National Residential Mortgage Servicing Standards Appraisals for Higher Risk Mortgages Qualified Residential Mortgage and Risk Retention Premium Capture Cash Reserve Account Regulation AB Compensation for Loan Officers and Mortgage Servicers RESPA-TILA Disclosure Integration HOEPA/High-Cost Mortgage Basel III Capital Standards

19 18 US RMBS Market Update Green Shoots Forming in RMBS…2013 Will See Further Progress QE3 - Low rates have investor looking for higher yields Performance on post crisis RMBS issued since 2010 has been excellent. RMBS activity has begun to increase $5.0 billion in 2012 $15-20 billion in 2013 New issuers launching programs Increasing non-agency production More lenders sourcing loans Improved secondary market liquidity Fear of rising rates reduce portfolio bid GSES execute risk-sharing transactions… Source: Fitch Ratings, Inside MBS & ABS MBS Issuance Post Crisis ($Bil)

20 19 US RMBS Update New Issue RMBS Transformation Significant RMBS 2.0 Strengths High-prime or ‘Super-Prime’ collateral Robust loan-level data High percentage of 3 rd party loan-level due diligence Conservative credit enhancement Representations and warranties with improved enforcement mechanisms Loan reviews to identify breaches Binding arbitration to resolve disputes Simpler deal structures RMBS 2.0 Risks Limited volume Small pools with loan and geographic concentration risk – tail risk Growing contributions of loans from smaller originators Rep and warranty construct Growing rating agency competition

21 20 Collateral Attributes SEMT SEMT SEMT SEMT SEMT SEMT CSMC 2012-CIM1* CSMC 2012-CIM2* CSMC 2012-CIM3* Pool Balance ($)415,728,134327,935,218293,590,499313,225,626320,339,050301,462,461746,000,384416,339,607329,886,459 Avg. Loan Balance ($)932,126895,998886,980842,004821,382842,074880,756891,520754,889 Number of Loans % Diligence (loan count)70.9%69.4% 79.0%87.0%85.0% 94.0%45.0%N/A100% Weighted Average FICO Weighted Average DTI29.0%30.4%29.4%30.9%31.4% 32.6%N/A31.2% Combined Loan to Value (CLTV) 64.9%66.0%68.7%67.6%68.4%67.7%70.6%69.4%69.2% Sustainable Loan-to-Value (sLTV) 73.9%73.5%74.3%74.4%76.8%77.0%82.0%78.5%80.9% ARMS%30.5%0.0% IO%22.6%10.0%5.2%7.0%4.9%1.6%0.0% Full Documentation100% 100.0% 97.6%N/A100.0% WA Original Term (Mos.) Piggy Back Seconds %16.1%18.7%13.7%10.3%7.2%8.9%7.6%9.7%7.5% Primary Residence %89.7%92.3%94.1% 94.3%95.1%94.3%96.4%98.0% Purchase %42.8%40.7%44.2%53.0%45.9%39.8%38.0%25.8%36.9% Single Family/PUD %86.8%88.6%90.9%89.8%90.8%92.4%89.3%89.1%97.4% Loan Seasoning(Mos.) CA Concentration48.6%49.6%49.2%43.2%44.0%44.9%37.3%48.0%36.8% AAA Subordination8.25%7.15%7.30% 7.05%8.00%8.25%5.85% * Fitch did not rate CSMC 2012-CIM1, CIM2 and CIM3 US RMBS Update High-Quality Prime Transactions

22 21 US RMBS Update With Stellar Performance… Deal SEMT SEMT SEMT SEMT SEMT SEMT SEMT SEMT SEMT CSMC CIM1* CSMC CIM2* CSMC CIM3* Deal Age (Mos.) Pool Factor 13.0%40.8%56.7%76.4%83.1%92.5%97.1%99.7%100.0%64.0%73.0% 99.0% 1-Month CPR 40.9%63.3%38.8%43.7%50.0%23.7%5.2%0.2%N/A59%63% 15% Life CPR 53.2%38.1%35.5%24.2%20.8%13.2%9.7%0.6%N/A44%45% 15% Delinquency % 0.0% 0.2%N/A0.32%0.0% 0.43% Initial ‘AAA’ CE 6.50%7.50%7.40%8.25%7.15%7.30% 7.05%8.00%8.25% 5.85% Current ‘AAA’ CE 25.70%16.71%12.79%10.63%8.52%7.84%7.49%7.31%7.05%12.39%11.24% 5.93% Original Balance ($ mm) Current Balance ($ mm) Number of Loans Remaining * Fitch did not rate CSMC 2012-CIM1, CIM2 and CIM3 1/11/13

23 22 Summary Consumer ABS (Credit Cards, Autos, most Student Loans) – solid asset performance expected to continue Areas to watch: Employment situation Subprime Auto Pre-crisis Private Student Loans New issue Private Label RMBS transaction quality will remain high but volume will be hampered by GSE dominance Areas to watch: New entrants GSE risk-sharing CLO market to remain active Areas to watch: New entrants “Covenant-lite” loans

24 23 7/26/12 Disclaimer Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided “as is” without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT


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