Risk-Transfer Buyers Wary of Loan Erosion

FEBRUARY 3, 2017

2 Fannie Pact Drives Refi Concerns

2 OneMain Crafting Longer-Dated Deals

3 Senior CLO Securities In Play

3 SEC Enforcement Staff Laying Low

4 ASF Income Defies Dormant Image

6 Litvak Ruling Handcuffs Prosecutors

6 Mariner Solicits LPs for CLO Play

8 SoFi Examines Government Charter

9 CALENDAR

10 INITIAL PRICINGS

11 MARKET MONITOR

THE GRAPEVINE

Guggenheim has hired another trader specializing in structured products. Ilan Bensoussan started his new job last month, trading mostly commercial mortgage bonds. He moved to Guggenheim from hedge fund operator Semper Capital, where he traded bonds backed by a variety of assets since 2013. Bensoussan previously worked as a structured-product analyst at Enterprise Bank. Meanwhile, Joe Guzzi, who previously served as head collateralized loan obligation trader at Guggenheim but last year moved to a sales role, has left the firm for parts unknown.

Mortgage banker Luke Scolastico parted ways with Credit Suisse about a month ago. His duties included work on jumbo-mortgage securitizations and bonds backed by nonperforming and reperforming home loans. Before

See GRAPEVINE on Back Page

Comptroller Swats Down JP Morgan Program

The Comptroller of the Currency has told J.P. Morgan that the bank can't claim capital relief via a mortgage-bond issuing strategy it began using last year.

The regulator's decision, which hasn't been made public, revolves around a $1.9 billion "portfolio risk-transfer" transaction that J.P. Morgan completed on March 24 and a $2.6 billion offering it priced on July 19. In both deals, the bank kept the senior securities while selling the junior pieces -- minus 5% slices retained to comply with the Dodd-Frank Act's risk-retention rule.

J.P. Morgan's belief was that the strategy would allow it to hold less capital against the retained bonds that it would have to set aside against the underlying agency and jumbo loans under the Bank for International Settlements' Basel 3 accord. But the Comptroller reasoned that the more-favorable treatment was impermissible because the bank continued to carry the collateral accounts on its balance sheet.

Under Section 3.41 of Rule 12 of the Code of Federal Regulations, banks seeking

See PROGRAM on Page 9

Risk-Transfer Buyers Wary of Loan Erosion

Investors in risk-transfer bonds from Fannie Mae and Freddie Mac are trying to measure the effects of deteriorating credit quality among the deals' weakest obligors.

While average credit scores have fallen across the transactions' underlying borrowers, the trend has been particularly pronounced among those with the spottiest histories. Consider that the average collateral scores for offerings conducted via Fannie's Connecticut Avenue Securities program initially stood at 766 in 2013, but had dropped to 749 for an issue completed Jan. 18.

That works out to a 2% weakening. At the same time, average scores for the bottom 2.5% of borrowers fell by 6%, from 695 to 653, according to data company Recursion.

Some investors are viewing the shift as a sign that Fannie and Freddie purposely are trying to lay off more risk on bond buyers amid moves to relax their loanunderwriting standards. Others suspect that the overall universe of borrowers has grown, leading to a natural increase in exposures to those with particularly low

See RISK on Page 4

Freddie Maps Reperforming-Loan Auctions

Freddie Mac plans to expand a program under which it funnels reperforming home loans into securitization pools.

A pilot version of the initiative was rolled out in July, with Freddie agreeing to sell $199 million of reperformers to New York-mortgage REIT Chimera Investment -- which in turn would fund the purchase with the proceeds from a bond sale. Now comes word that the agency wants to complete a follow-up transaction by March 31.

After that, the expectation is that Freddie would conduct similar sales every few months via auctions aimed at mortgage-bond issuers with experience in managing high-risk asset pools. Sources point to REITs New York Mortgage Trust and PennyMac Loan Services as being among the agency's potential counterparties.

Each of the asset purchases is expected to follow Chimera's format. That transaction closed in October, with the REIT simultaneously bundling the loans into a

See FREDDIE on Page 4

February 3, 2017

Asset-Backed

2

ALERT

Fannie Pact Drives Refi Concerns

Investors are expressing unease over rental-home bonds following Fannie Mae's agreement to guarantee some of Invitation Homes' future offerings.

Invitation parent Blackstone revealed in a Jan. 23 SEC filing that Fannie would back $1 billion of its securities. The concern among buysiders, particularly large asset managers and insurers, is that a broadening of the program could prompt Invitation and other issuers to call existing deals ahead of time to refinance via lower-cost agency transactions.

That process likely would entail the replacement of the bonds' underlying receivables with new conforming accounts.

The outlook is troublesome for current bondholders because it makes it more difficult to predict when they will recover their principal, while increasing the odds that interest payments will stop flowing sooner than expected. Principal losses also are possible for securities sold at above-par prices -- a classification that previously encompassed most secondary-market trades.

In some cases, buysiders are responding by reducing their purchases of rental-home paper. "The uptick in prepayment risk has forced me to the sidelines until I can figure out what this means," the manager of one insurance-company portfolio said.

There also were reports this week of an increase in the number of Invitation bonds out for bid on the secondary market. With only a small amount of the paper actually changing hands, sources characterized the offerings as possible attempts by bondholders to determine whether Invitation's arrangement with Fannie had affected the values of their positions. "They were throwing them out there to see if their values had dipped. In some cases they did," one trader said.

For example, triple-A-rated bonds with five-year lives that Invitation issued in 2014 were on the market this week with an asking price of 99.85 cents on the dollar. Last week, the same securities were available at 100.01 to 100.04 cents. "This is just the beginning. They are going to fall further, no doubt," another trader said.

The concerns about a possible expansion of Fannie's program build on nervousness last year that tightening spreads and home-price appreciation also would lead to refinancing of existing deals. In July, for example, Progress Residential priced an $832.9 million transaction that refinanced a 2014 securitization -- taking out an undisclosed amount of cash amid a 17% increase in the values of the underlying properties.

The possibility of early principal payoffs is greatest for deals issued from 2013-2015, as the issuers of those transactions can retire them ahead of schedule without penalty. Offerings completed in 2016 or later typically carry financial penalties that decline over time.

Floating-rate bonds are seen as particularly susceptible to refinancing, with the replacement bonds carrying fixed interest rates. Roughly two-thirds of the deals completed in the asset class so far have been floaters, including all of Invitation's offerings.

"Fannie wrapped [rental-home] securitizations raise the possibility of widespread prepayments," Bank of America senior researcher Chris Flanagan wrote in a Jan. 27 report. Flanagan is warning investors to avoid paying above-par prices for any floating-rate bonds issued in the asset class in 2015 or earlier.

Dallas-based Invitation, which writes so-called landlord loans, has been the largest issuer of bonds backed by rentalhome cashflows to date with $5.3 billion of transactions, according to Asset-Backed Alert's ABS Database. Other refinancing candidates include American Homes 4 Rent, Colony Starwood Homes, Progress and Tricon American Homes.

Under its arrangement with Fannie, Invitation would comply with the Dodd-Frank Act's risk-retention requirement by keeping $50 million of subordinate notes from its deals. Fannie

See CONCERNS on Page 6

OneMain Crafting Longer-Dated Deals

OneMain Financial has added a twist to an auto-loan securitization program that already stood out for its unique approach.

On Jan. 26, the Baltimore company sold $209 million of bonds backed by loans to drivers who already owned their vehicles but needed to borrow against them to pay for expenses including medical bills and debt consolidation. The transaction was the second in the program, following a debut transaction in July. But unlike the earlier offering, last week's issue was underpinned by a revolving pool of loans -- a feature that is common in credit-card securitizations but rarely seen in autoloan deals.

By setting up a revolving pool in which it can swap in fresh loans, OneMain was able to stretch out the maturities on the bonds. The top class, encompassing $209 million of notes rated Aa3/AA (high)/AAA by Moody's, DBRS and Kroll, has a weighted average life of 1.7 years -- nearly twice the length of the senior tranche in last year's deal (see Initial Pricings on Page 10).

OneMain tapped Natixis to run the books on last week's offering it borrowed a page from Ford, which in 2014 crafted the first securitization backed by a revolving pool of auto loans. The expectation is that OneMain is good for one or two more autoloan deals before yearend, likely employing a revolving structure in a response to investor demand for longer-dated paper.

Via a unit dubbed Direct Auto, OneMain originates a mix of prime-quality and subprime loans, with an average credit score of 610. The loans carry average interest rates of 17.7%. The debut deal saw OneMain sell $753 million of bonds backed by such loans, with Barclays, Credit Suisse and Natixis running the books.

OneMain is best known as an originator of unsecured personal loans. It conducted three securitizations of these accounts last year totaling $1.5 billion.

Formerly a unit of Citigroup, OneMain was purchased by Springleaf Holdings in 2015. Springleaf, controlled by Fortress Investment, adopted the OneMain brand.

February 3, 2017

Asset-Backed

3

ALERT

Senior CLO Securities In Play

Strong secondary-market demand for collateralized loan obligations has lifted the values of subordinate notes to the point where investors now are bidding up senior paper.

That's unusual for the CLO market, where trading is heavily focused on the highest-yielding pieces while triple-A-rated paper is largely an afterthought. But in the past two weeks, investors have traded some $400 million of senior bonds -- well above the average volume for the top classes, sources said.

"One of the triple-A bonds was sold at a discount margin of 110 bp," one trader said. "That matches the tightest ever seen."

With the new-issue market virtually frozen since the start of the year, CLO investors have turned their attention to the secondary trading. In the first few weeks of January, heavy demand for mezzanine bonds and equity pieces produced a rally that quickly ran out of steam as the narrowing spreads became too tight for most buyers.

That prompted some buysiders to bid on senior securities. The activity involved mostly smaller investors, possibly including community banks, snapping up triple-A-rated paper in chunks of $5 million to $10 million.

Larger institutions, meanwhile, have been sating their appetites by investing in an ongoing flurry of deals meant to refinance issues completed in 2013-2014. At least 16 such transactions have taken place since Jan 1.

In contrast, just four new CLO offerings have priced this year, including two on Feb. 2. Issuers have been held back by a combination of factors including a dearth of collateral loans and the challenge of meeting new risk-retention requirements under the Dodd-Frank Act.

"There are a lot of questions still about . . . who takes responsibility [for risk retention] and how that assurance gets delivered," a CLO lawyer said. "I think it will take a little while before we have a consensus. Banks are still figuring out how they need things to work, and managers are still trying to figure out how to write the disclosure to investors."

The risk-retention mandate doesn't apply to refinancings, so long as the offerings mirror the original transactions. The expectation is that the pace of refinancings will continue as more banks and other large investors move into the market.

"It's opening up a bigger buyer base," one investor said. "Roll the clock back two years ago and Pimco was the only buyer. Now you have two classes. You have guys who bought the deal at new-issue that are increasingly happy to stay in, and you also have new players who didn't buy it the first time around joining Pimco -- people like BlackRock and others."

The demand for those deals is evident in spreads that continued tightening this week to 117-118 bp over three-month Libor for triple-A-rated bonds with lives of 3-5 years, compared to 120 bp last week.

On the new-issue side, the only deals completed this week were from Sound Point Capital, which priced $664 million of paper via MUFG, and THL Credit, which sold $612 million of bonds via Morgan Stanley.

SEC Enforcement Staff Laying Low

Predictions that the SEC would ease its enforcement efforts under the Trump Administration already are being realized.

Sources describe an environment within the regulator's enforcement division in which employees are reluctant to pursue new investigations or proceed with current ones. Even some lawsuits that already are under way could be shelved.

"People are too meek and weak to make decisions, and no career bureaucrat is going to step out just to get slapped down," one source said. "[SEC investigators] don't know where they are going with direction. If they see bad stuff, should they continue to be active? The intensity of the dialogue isn't the same as it was six months ago."

The areas where SEC employees are backing off include probes of potentially misleading lending and securitization practices among originators of subprime auto loans and marketplace loans. The agency's past actions in those areas have included requests for documents from Ally Financial, General Motors Financial and Santander Consumer USA.

Those inquiries, which remain open, came in conjunction with U.S. Justice Department subpoenas of the three companies in 2014 for their "subprime automotive-finance and related securitization activities."

It has been no secret that SEC would de-emphasize prosecution efforts while attempting to foster corporate growth under President Trump, especially following his Jan. 4 nomination of Walter "Jay" Clayton to succeed Mary Jo White as the regulator's chairman. The sudden stoppage, meanwhile, reflects a fear of acting without specific orders.

Expectations that the SEC will take a less-aggressive approach in part reflect the fact that Clayton, a lawyer at Sullivan & Cromwell, doesn't have an enforcement background. White, who resigned Nov. 14, was a career prosecutor who earlier served as U.S. Attorney in New York.

Also gone is SEC enforcement head Andrew Ceresney, who worked under White at the Justice Department. He resigned from the SEC on Dec. 31, in another move that is adding to staffers' uncertainty about the actions they should pursue.

Another factor: The SEC is operating with only two commissioners, with two seats waiting to be filled. One commissioner, Republican Michael Piwowar, is serving as acting chairman. "They need commissioners, a head of enforcement and heads of units within enforcement," another source said. "The SEC operates in a political environment, and even when those positions are filled there will be less delegated authority at the unit level to take cases forward."

Enforcement actions soared under White, including a push alongside the Justice Department to punish traders who allegedly overstated bond prices to investors. Even those cases could be losing momentum (see article on Page 6).

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February 3, 2017

Asset-Backed

4

ALERT

ASF Income Defies Dormant Image

Money is still flowing into the American Securitization

Forum.

The trade group, once the leading advocate for securitization-related causes, reported to the IRS in September that it collected $132,500 of program-service revenues during the year ended Oct. 31, 2015, entirely via membership dues. It also earned $293,415 of income on net assets of $6.2 million, most of which is invested in publicly traded securities.

The membership income suggest ASF continues to operate, at least on some level. That contrasts with a widespread view among industry participants that the organization had gone largely dormant after most of its constituents broke off in 2013 to form the Structured Finance Industry Group. ASF's assets largely pre-date that breakup.

That said, the cashflows pale in comparison to those that ASF generated prior to the breakup. For 2013, for example, the group reported $7.8 million of program service revenues -- including $2.2 million of membership dues and $3.8 million of conference earnings.

ASF executive director Tom Deutsch declined to identify the group's current members or activities. He earned $96,358 during the year ended Oct. 31, 2015, compared to $1.1 million in 2014 and more in the preceding years. His only remaining employee, administration head Justin Ross, received compensation of $143,316.

The duo maintains a small office subleased from Cadwalader Wickersham at One World Financial Center in New York. Deutsch was employed as a securitization attorney at Cadwalader from 2002 to 2004. The law firm isn't affiliated with ASF.

ASF's membership exodus resulted in part from tensions between Deutsch and a number of the companies he represented, including banks and law firms, over his authority over financial decisions -- including his own compensation. Some former members threatened to sue Deutsch following the breakup. But the action never materialized, with ASF retaining its assets.

SFIG's membership has since grown to more than 300. As the largest securitization trade group, it also has supplanted ASF as host of the industry's main-event conference. The next edition, "SFIG Vegas 2017," is expected to draw more than 6,000 attendees to the Aria Resort & Casino in Las Vegas on Feb. 26-March 1.

Risk ... From Page 1

scores. At the same time, certain investors would welcome more

risk if it meant a larger return -- in part because strong housing-market conditions offer some insulation from borrower defaults. Strong demand for risk-transfer securities typically has meant shrinking returns, however, with spreads remaining on a tightening trajectory over the past several months. "People want to be cognizant of what spreads are paying versus what the average pool looks like," one source said.

Even with the decline in credit scores, meanwhile, many industry participants are playing down the risk to investors.

Bondholders on the mezzanine levels have benefitted from a slight increase in subordination, for example.

Falling loan-to-value ratios and rising home prices also have added to investor protections, as has a brighter economic outlook. That helps explain one analyst's view that a Dec. 1 transaction from Fannie wasn't measurably riskier than its predecessors despite a 12.3% exposure to borrowers with scores of 690 or lower, versus 4% for the earliest transactions.

He added that some weakening of credit scores would be expected because the first risk-transfer pools formed when post-credit-crisis caution led to unusually strict underwriting standards. Fannie and Freddie also saw a need to assemble particularly pristine pools at the outset, given buysiders' unfamiliarity with the product. "It would be normal to see some FICO drift remembering that the pools being referenced date back to 2012 to 2013 . . . but it hasn't been too significant," the analyst said.

Risk-transfer bonds are structured as credit-linked notes in which the reference loans remain on the issuers' books. The agencies typically retain the deals' top pieces while selling the mezzanine and junior classes, with those at the bottom absorbing losses as soon as the underlying loans default.

Alex Levin, who oversees financial engineering at Andrew Davidson & Co., said actual losses for subordinate investors have been miniscule, while secondary-market prices for their holdings have climbed to about 120 cents on the dollar from par since mid-2016.

"We had pretty tight spreads on our recent deal, which we view as broad market acceptance of the strong credit fundamentals," a Freddie spokeswoman said, referring to a transaction completed on Jan. 31 (see Initial Pricings on Page 10).

Along with falling credit scores, Fannie and Freddie have tweaked characteristics of their asset pools. For example, the percentage of collateral loans from California has varied from 6% to 30% across the agencies' deals, according to Recursion. The New York analytics shop is led by founder Li Chang.

Counting only unguaranteed securities, Fannie and Freddie have issued a combined 45 risk-transfer deals totaling $32.7 billion, according to Asset-Backed Alert's ABS Database. Both agencies are expected to increase their outputs this year.

Freddie ... From Page 1

securitization while retaining a first-loss position in the deal. Freddie guaranteed and bought the issue's senior notes, which it is expected to sell at a later date.

The bond offerings are subject to the Dodd-Frank Act's riskretention rule.

The program is part of a broad push by Freddie to reduce illiquid holdings in its mortgage-product portfolio, with an eye toward keeping troubled borrowers in their homes. Most of the loans involved have been reperforming for less than six months or have fallen back into the early stages of delinquency, with an average loan-to-value ratio of about 70%. They include a large number of older option adjustable-rate accounts that were modified under the Federal Housing Finance Agency's Home Affordable Mortgage Program, which expired Dec. 31.

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February 3, 2017

Asset-Backed

6

ALERT

Litvak Ruling Handcuffs Prosecutors

The outcome of Jesse Litvak's retrial on federal securitiesfraud charges represented a serious blow to the U.S. Justice Department's ability to pursue similar cases.

The Jan. 26 decision saw the former Jefferies trader convicted by a jury in U.S. District Court in New Haven, Conn., on just one of the 10 counts he faced -- specifically, that he altered electronic records forwarded to Invesco to overstate the prices he paid in a mortgage-bond trade.

Why could that trip up further prosecution efforts? Like the nine now-cleared allegations against Litvak, those cases rely on accusations that the defendants improperly boosted their commissions via verbal or written misrepresentations of bond prices.

Litvak originally was convicted of a host of violations in 2014. But the ruling was vacated on appeal in 2015, setting the stage for his retrial. All along, the Litvak proceedings have attracted a following for possible precedents that could affect Justice Department efforts to clamp down on improper trading practices.

Now, with the final ruling in hand, other targeted individuals are sharpening their defenses. For example, sources said attorneys representing former Nomura structured-product traders Michael Gramins, Tyler Peters and Ross Shapiro in a similar trial are considering a request for prosecutors to drop all charges against them. In a possible precursor to such a filing, the lawyers asked U.S. District Court in Hartford on Feb. 1 to modify the trio's bail conditions while writing that Litvak's verdict "raises serious questions about the strength of the government's case against the defendants."

Gramins, Peters and Shapiro are accused of misstating bond prices to clients, but aren't charged with altering documents. Their trial is scheduled to begin May 2. "The jury didn't give the government anything on markups, which is the heart of the other cases," one source said. "If prosecutors take a hard line and try to prosecute all the other traders, they might get drilled. Given what happened with Litvak, this investigation is over."

Former RBS traders Matthew Katke and Adam Siegel also could find themselves off the hook. Both men pleaded guilty in 2015 to one count that they overstated structured-product prices to clients -- while cooperating with the government with the understanding that they could withdraw their pleas in the event of a ruling in Litvak's favor. Neither was accused of altering documents. Nor was former Cantor Fitzgerald trader David Demos, who was charged Dec. 4 of overstating his purchase prices.

The Justice Department also is believed to be investigating a number of other traders, relying mostly on accusations of improper markups. "Litvak was the poster child for these cases and the government really lost its headline trial," said an attorney representing another trader who was investigated but wasn't charged. "Do they really want to take another run with this, and will the new attorney general under the Trump Administration let them? I'm not worried about my client. The jury said Litvak's lies weren't material."

A Justice Department spokesman declined to comment.

Mariner Solicits LPs for CLO Play

Mariner Investment is pushing to raise $200 million for a fund that would invest in the junior pieces of collateralized loan obligations.

The New York firm launched its Mariner CLO Opportunities Fund in March 2016 with $30 million from its parent, Orix USA. It is now embarking on a broad marketing campaign for the vehicle, which would lock up investor capital for at least three years.

The fund got off to a strong start, gaining 31.5% during the last nine months of 2016. The timing of the launch allowed Mariner's CLO team to buy mezzanine notes and equity pieces on the cheap after values plummeted in late 2015 and early 2016. The fund gained 14.7% in April alone.

Mariner's current CLO business took shape in 2014, when it hired a 13-member team from Orix led by Erik Gunnerson and David Martin. In addition to managing portfolios of CLO and leveraged-loan investments totaling $2.1 billion, the team has issued two CLOs with a combined balance of $838 million.

It's unclear if Mariner CLO Opportunities Fund will invest in CLOs issued by Mariner itself. But the fund's life is too short for it to help the firm comply with the Dodd-Frank Act's riskretention rule. Under that measure, CLO issuers or their surrogates must retain 5% interests in their deals for the entire life of each offering. That typically entails locking up capital for at least 10 years.

Once Mariner reaches its fund-raising goal, the fund would deploy capital over a period of 12-18 months, then liquidate the positions opportunistically in the ensuing 2-3 years.

Tokyo-based Orix has held a majority stake in Mariner since 2010. On Sept. 30, the hedge fund firm's overall assets totaled $42.9 billion on a gross basis.

Concerns ... From Page 2

would back the remaining $950 million, although it remains to be seen if the guarantees would apply to the bonds or the underlying loans.

Wells Fargo is helping to develop the transactions' structures.

Given the fact that Fannie's missions include expanding access to affordable housing, industry participants believe its involvement in rental-home financing could grow well beyond its pilot program with Invitation -- potentially sparking even broader growth in the single-family rental industry. The loan refinancings involved likely would see a shift away from today's typical format of a five-year floating-rate account and toward fixed-rate financing with longer terms.

That said, a source close to the program cautioned that the process is "nowhere near a done deal, particularly on the duediligence front."

Blackstone's SEC filing came as part of a plan to take Invitation public. The investment giant completed that process on Jan. 31, raising $1.5 billion while retaining a majority stake in the company.

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February 3, 2017

Asset-Backed

8

ALERT

SoFi Examines Government Charter

Social Finance's agreement to buy mobile-banking company Zenbanx could position it as one of the earliest institutions to seek a special type of bank charter for online lenders.

At issue is a move last year by the Comptroller of the Currency to create a special purpose national bank charter for those types of operations. Under the initiative, a company with a so-called fintech charter would largely be held to the same standards as a traditional bank -- with some customization to account for differences in business models.

An online financial institution whose deposits aren't insured by the FDIC, for example, would be exempt from laws governing FDIC-insured institutions. Capital charges also presumably would be lighter than those for traditional depository banks.

With a comment period on the proposal already having ended on Jan. 15, the Comptroller is formalizing an application process. SoFi appears to be interested, in part because its takeover of Zenbanx will bring it into the business of offering

mobile deposits, money transfers and credit cards. Eventually, SoFi could convert to a traditional bank.

SoFi started as an education lender and more recently has expanded into personal loans and mortgages, with a focus on high-income borrowers. Counting only rated transactions, it raised $4.4 billion through a combined 12 securitizations of those assets in 2016, according to Asset-Backed Alert's ABS Database.

So far this year, SoFi has completed one student-loan securitization. A personal-loan offering is expected to follow soon, as the company moves ahead with plans to increase its assetbacked bond output by two or three deals this year -- including some $2 billion of offerings in the first quarter.

SoFi also funds itself through loan sales and private equity investments. It lent out $5 billion over the first 10 months of 2016, and is projecting a 75% expansion this year.

The takeover of Zenbanx, scheduled to close this month, comes as part of a push to offer a broader suite of services including financial advice and job placement. Zenbanx is led by former ING Direct chief executive Arkadi Kuhlmann.

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