Deutsche Bank’s 2011 MBS and Securitization Conference

27 Jan

A journey of 1,000 miles begins with a single step.

It’s fitting my inaugural post is a review of Deutsche Bank’s inaugural MBS and Securitization Conference.  The conference attended by some 60 investors from roughly 40 companies highlights DB’s poor standing in the world of structured finance (SF). Deutsche Bank has never been a major player in the securitized finance market though it has spent billions trying to be. In 1996, DB bought Morgan Grenfell to create Deutsche Morgan Grenfell and hired senior bankers from Goldman Sachs and Merrill Lynch.  When the Russian Currency crisis hit, DMG fired all but 3 of its SF staff after paying almost a billion dollars of guaranteed bonuses. They tried again after the Banker’s Trust purchase and this is their third attempt. Third time is a charm right? Nope.  The conference demonstrated the lack of gravitas so evident at Goldman, Morgan Stanley and even, may they rest in peace, Bear Stearns.

Deutsche bank event planners decided to hold this poorly attended conference not in a fancy hotel (like Citi or Wachovia) but in an auditorium two stories below street level in their “marque building” 60 Wall Street. Fortunately, the poor catering did not make me sick.  Good job of impressing investors.

Cautiously Optimistic

Deutsche Bank’s chief economist, Peter Hooper, presented his view of the US Economic outlook which he summed up in two words, cautiously optimistic.  Dr. Hooper discussed the downside risks of the economy including:

  • Recovery from the financial crisis will likely take a decade.
  • Household balance sheets continue to pay off debt instead of spending.
  • Home prices continue lower with the overhang of inventory and the wave of foreclosures.
  • European sovereign debt issues.

Dr. Hooper concedes the downside risks are potent and the US consumer is extremely vulnerable to external shocks (i.e. fuel prices, debt ceiling, and etc). However the upside risks has him feeling … well … cautiously optimistic.  The upside risks are:

  • Pent up demand for durable goods. For example, the total light vehicle sales is significantly below the 12 year historical per capital break even rate and business equipment spending is rising from historic 40 year lows.
  • Household saving rate is poised to fall.
  • Employment rising
  • And an expected rise in household formation. (Time for your kids to move out and get a job!)

Wanna buy a nice new house in Las Vegas?

Steve Abrahams, Head of MBS and Securitization Research, discussed the current US real estate market and how investors should think about it.

Not surprisingly, the US housing markets is weak. Heavy housing supply suppresses home values especially in the sand (AZ, CA, NV, and FL) states. Tight credit prevents all the most pristine borrows from getting loans and unemployment hurts increased household formation. Despite Dr. Hooper’s prediction, Mr. Abrahams predicts home prices to drop nationally another 5-11% through 2012 (Florida of course will take much longer.)  The major driver of home prices is the significant supply of houses from foreclosures. Moreover, DB predicts the private RMBS market will not return until 2012 where they expect $20B of new supply. In 2006, private RMBS issuance totalled over $800B. In 2010, a single RMBS deal was issued for $244m.

Like everyone else in the market, the restart of future private MBS securitization requires the regulatory environment to stabilize.

DB recommends buying credit and buying shorter duration agency paper.

Commercial Real Estate grows but slowly.

Commercial mortgage backed securities, unlike MBS, economics are improving. Prices on AAA rated CMBS securities increased significantly over the last 12 months and almost $10B of new securitization occurred in 2010. DB predicts 2011 CMBS issuance will be close to $40B because:

  • Banks have healthy balance sheets. TARP did its job and the money has been repaid.
  • Increasing CRE delinquencies is offset by investors calling the bottom of the economy. CRE and CMBS performance typically lags the real economy by 18 months.
  • Cap rates are the lowest level since the crisis began.
  • Lastly, rents have stabilized with the exception of apartment buildings.

Nothing changes.

The conference had several investor panels in which participants talked their book. As investors, we are still driven by our quarterly P&L and the panelists didn’t deviate from this golden rule. One panelist complained bitterly how all the residential mortgage loans are securitized by Fannie Mae and Freddie Mac. If these two wards of the state went away the private securitization market would take over. When questioned by a conference attendee, the panelist said mortgage rates would likely climb 200-300 basis points and the market would loose a buyer of last resort (unless the Fed could be convinced to go back in).

One panel had rating agency representatives discussing the importance of ratings in SF v2.0. As I expected, rating agencies still haven’t received the message no one trusts them anymore and won’t for a very long time, if ever. Rating agencies, who played the village idiots in the financial crisis, do not have the models or personnel to adequately rate securities. Additionally, the Dodd-Frank Act and other regulations now excludes regulatory agencies from considering ratings.  When asked, none of the rating agency executives knew when their ratings will be relied on again.

In closing

Deutsche Bank’s conference did not cover any new ground or earth-shattering pronouncements. DB like other investment banks are trying to restart the formerly very lucrative originate to securitize market in an uncertain regulatory environment. I wish them luck and hope next years conference is much much better.

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10 Responses to “Deutsche Bank’s 2011 MBS and Securitization Conference”

  1. Royal Arse January 28, 2011 at 1:17 am #

    ” In 2006, private RMBS issuance totalled over $800B. In 2010, a single RMBS deal was issued for $244m”.  Wow! By my very rough math, investors went from buying nearly 1/10th of the outstanding mortgage stock to about 2%.

    So if they sold this crap, and now can’t where is all the risk hiding? As referenced, the GSE’s own the paper, “panelist said mortgage rates would likely climb 200-300 basis points and the market would loose a buyer of last resort (unless the Fed could be convinced to go back in).” Suppose Fan and Fred dispose of these assets would the UST market budge? Would there be a divergence between the historical relationship b/w the 10-year UST and mortgage rates?

    • Royal Arse January 28, 2011 at 9:29 am #

      “By my very rough math, investors went from buying nearly 1/10th of the outstanding mortgage stock to about 2%”

      2% should be 0.2%.

      • Naked Bond Bear January 29, 2011 at 4:58 pm #

        R.A (BTW I love your handle. Been called more times that I can remember).

        Responding to your comments:

        1) In 2006, roughly $1.3 Trillion of mortgages were securitized or which more than 55% went to non-agency securitizations.
        2) Fanne & Freddie were worried about loosing relevance in the US mortgage market but could buy many subprime loans because of high guarantee fees. The GSEs purchases subprime securities like all down wind investors
        3) Almost all investors have already impaired their bonds and have take the losses.
        4) Will the 10yr / MTG spread widen if FNM/FRE go away? Yes by 200-300 bps.

        Cheers.

  2. The Analyst January 28, 2011 at 3:12 pm #

    What section of Dodd-Frank (etc) prohibits regulators from considering ratings? NRSRO regs still seem to be in place last I checked, no?

  3. Nowaday banking has got rather a negative status.

  4. dentystyczny February 19, 2011 at 8:25 pm #

    You need to take a lesson from my Canadian-born father and start rooting for the country of your citizenship: America. Few things are more annoying than someone who becomes a citizen on paper, but not with their heart.

Trackbacks/Pingbacks

  1. 1/28 Buybacks « Stone Street Advisors - January 28, 2011

    […] Welcome to our latest contributor, Naked Bond Bear. NBB has a ton of expertise in the finer points of structuring and fixed income. You can catch his latest article here which talked about his recent experience at the annual DB Securitization Conference here […]

  2. 1/28 Buybacks | SHOUTing GORIlla - January 28, 2011

    […] Welcome to our latest contributor, Naked Bond Bear. NBB has a ton of expertise in the finer points of structuring and fixed income. You can catch his latest article here which talked about his recent experience at the annual DB Securitization Conference here […]

  3. Tweets that mention Deutsche Bank’s 2011 MBS and Securitization Conference « Stone Street Advisors -- Topsy.com - January 28, 2011

    […] This post was mentioned on Twitter by Ashok Chandra and CJ Johnson, Dutch Book. Dutch Book said: We've got another new author at Stone Street, read Naked Bond Bear on the DB Struc Fin conference http://bit.ly/eDvmLK […]

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