SFA Research Corner
A weekly publication that follows trends in the primary and secondary securitization markets and a brief analysis of the macro indicators that impact our industry.
SFA Research Corner: Assessing Appraisal Waivers and AVMs – November 18, 2021
On October 18th FHFA Acting Director Sandra L. Thompson announced that the temporary use of desktop appraisals, adopted during the Covid-19 crisis, would become an established option. The FHFA is also considering the risks and benefits of the increased use of appraisal waivers, up more than 6.9 times the average level in 2018, as it continues to modernize the appraisal process. Additionally, the FHFA requested industry input on the risks posed by increased use of waivers and automated valuation models (AVMs) and comments on how expanded AVM use could impact racial bias in property valuations. Modernization of the appraisal process is included in the 2022 FHFA Scorecard, which holds the Enterprises “accountable for fulfilling their core mission requirements by promoting sustainable and equitable access to affordable housing and operating in a safe and sound manner.” Read more.
SFA Research Corner: Container Lease ABS – A Port in the Global Shipping Storm – October 27, 2021
As the broader shipping industry continues to be buffeted by supply chain complexities, container lease ABS have been buoyed by the rebound in global trade as demand for shipping containers has kept lease rates at all-time highs. In 2020, the ABS market saw 12 container lease ABS transactions totaling $7.2 billion, a record for the sector. And with $5.2 billion issued so far this year, 2021 is on track for another robust year. Even taking into account ESG issues like de-carbonization commitments and requirements to retool refrigerated containers with non-HFCs, freight transport (90% of which travels on ships in containers) has the healthy expectation to more than double by 2050, which bodes well for container ABS going forward. Read more.
SFA Research Corner:A Deluge of Deals in September Sets New Highwater Mark – October 21, 2021
New-issue activity in September reached $92 billion, the strongest month of issuance for non-agency RMBS, CMBS, ABS and CLOs, to date in 2021. Another $23 billion issued in the first two weeks of October helped volume reach $710 billion, surpassing in under 10 months the level reached for the entire year of 2019. Driving this activity has been strong investor demand, and an understandable desire by issuers to avoid taper noise and to mitigate the effects of a LIBOR transition deadline. Despite the torrent of new supply, demand has kept bond prices firm. Read more.
SFA Research Corner: CLO Update—From Uncertainty to Thriving, But Mind the Zombies – September 22, 2021
CLO upgrades have outnumbered downgrades since the beginning of the year and thanks to an abundance of liquidity, the CLO exposure to defaulted leveraged loan collateral is now below pre-pandemic levels. Strong fundamentals and a search for yield has encouraged investor appetite for CLOs, easily absorbing this year’s new issue supply, which is on track to best 2019’s record year. As the leveraged loan pipeline continues to build, we anticipate a vigorous new CLO market for the near-term. One caveat to the rosy CLO outlook going forward is the potentially negative impact that newly created zombie firms will have on CLOs with exposure to them. Read more.
SFA Research Corner: End of Unemployment Benefits Could Lead to Short-Term Up-Tick in Delinquencies and Credit Card Debt – September 15, 2021
Close to 9 million Americans still impacted by pandemic-related unemployment saw the end of benefits on Labor Day. Federal Reserve research suggests that this support, while it was available, was used to pay down debt and stay current on bills. Without this support, we may see a rise in delinquencies, potentially impacting ABS performance, as hurdles to employment remain. Consumers may resort to credit cards for short-term liquidity. Read more.
SFA Research Corner: Household Balance Sheets and Labor Markets Robust Even as Relief Programs Roll Off – September 7, 2021
On August 26, the Supreme Court upheld a ruling to vacate the CDC’s eviction moratorium. This pandemic assistance program, which has primarily benefited lower-income households, has helped households stay current on their debt obligations despite elevated levels of unemployment. As the labor market and household balance sheets strengthen, usage of these programs has declined. Unemployment, expected to be re-established as the leading indicator of credit performance, will be the metric to watch as households begin to recover their economic footing. Read more.
SFA Research Corner: Strength in Non-QM and SFR Supports Surge in Non-Agency RMBS – August 12, 2021
Non-agency RMBS issuance is on track for a new post-2008 record. Year-to-date, new issue has reached $119 billion, surpassing 2020’s full-year volume and just 12% below 2019’s record year. Issuance for RMBS backed by non-QM and SFR loans are particularly robust and are expected to surpass previously set records. In this week’s research, we take a closer look at these two RMBS sub-sectors. Read more.
SFA Research Corner: Hertz’s New Lease on ABS – July 19, 2021
Hertz raised $4 billion through two ABS offerings from its new term ABS shelf, Hertz Vehicle Financing III. As a testament to the strength of the securitization market, investors’ search for yield in a prolonged low interest rate environment, and growing confidence in the recovery of the travel sector, Hertz raised this capital even as the company emerged from a highly visible Chapter 11 bankruptcy filing, a period of tumultuous leadership changes, and a global pandemic that shuttered the travel and tourism industry. Read more.
SFA Research Corner: The Road Back: What a Difference a Jab Makes – June 23, 2021
With more than 50% of Americans vaccinated, consumers are increasingly comfortable in resuming travel and leisure activities. This sector, which had struggled even as other sectors began to recover, has started to show meaningful signs of improvement. Increased activity in this sector will directly impact performance of CMBS, particularly those pools with sizeable exposure to hotels, and ABS backed by aircraft leases, timeshare loans, rental car fleet leases, and credit card loans. Read more.
SFA Research Corner: Continued Jobs Improvement Supports Securitization – June 8, 2021
The May jobs report, while positive, reflects a labor market still dealing with the lasting effects of the pandemic. Improving labor market conditions support securitization. In a recent report, Moody’s viewed “fundamental risks for securitization assets as generally declining.” In contrast to 2020, in 2021, upgrade volume has surpassed downgrade volume. Read more.
SFA Research Corner: Helping Lenders Fund America’s Small Businesses – May 24, 2021
Small businesses represent nearly half of total employment in the U.S. and account for over 65% of net new job creation since 2000, according to the U.S. Small Business Administration. They are critical to local economies in both urban hubs and rural communities and play a key role in empowering minority and at-risk populations. Small business loan (SBL) securitizations may be issued by private lenders or offered through the one of three SBA lending programs – serve a common purpose – to increase the lending capacity of lenders and provide small businesses with reliable access to capital. Read more.
SFA Research Corner: Lending Conditions, One Step Forward, and Jobs Data, Two Steps Back – May 13, 2021
Banks’ willingness to lend and demand for loans drive securitization volume. The Federal Reserve’s April 2021 Senior Loan Officer Opinion Survey on Bank Lending Practices indicates that both of these measurements improved in the first quarter of 2021. Weak jobs data, if sustained, may pose a challenge to the return of the more favorable lending environment that characterized the pre-pandemic period. Read more.
SFA Research Corner: Confidence in CLOs Boosted by 2020 Resiliency and 2021 Economic Recovery – May 3, 2021
Stronger than expected first quarter activity and a pickup in vaccine distribution have resulted in more optimistic outlooks. Based on a stronger and sustained economic recovery, S&P Global Ratings has lowered its projected S&P/LSTA Leveraged Loan Index issuer default rate to 2.75%, which bodes well for CLOs performance in 2021. Moreover, “[t]he resilience of CLOs through the 2020 downturn has bolstered confidence in the asset class,” explains Steve Andergerg Managing Director and CLO Sector Lead at S&P Global Ratings. Read more.
SFA Research Corner: Serving the Underserved – April 28, 2021
Community Development Financial Institutions are private financial institutions whose primary mission is to support community development by providing financing to low-income, low-wealth individuals — a population that has been historically underserved by traditional lenders. By including CDFI loans in securitized pools, securitization is an important funding tool that can connect investment capital to underserved communities. Read more.
SFA Research Corner: Trends in Auto ABS – April 20, 2021
Used vehicle prices rose 5.87% to 179.2 in March, as reported by the Manheim Used Vehicle Index. March’s value is 26% above its level one year ago and is a record high for the Index. Robust used car prices limit the severity of losses in auto ABS portfolios. We review these and other market trends in auto ABS. Read more.
SFA Research Corner: Revolving Debt and Credit Card ABS – April 14, 2021
Revolving consumer debt, which primarily represents credit card balances, rose $8 billion in February to $974.4 billion, the largest month-over-month increase of this measure since 2019 according to the Federal Reserve’s G.19 Consumer Credit Report. We look at how increased spending has been supportive of credit card ABS. Read more.
SFA Research Corner: A Tale of Two Mortgage Markets – April 7, 2021
On April 2, the Wall Street Journal reported that while “[t]he mortgage market is humming … getting approved for a home loan is as difficult as it has been in years.” We take a look at these credit trends and the impact of stubbornly high jobless numbers. Read more.
SFA Research Corner: March Came in Like a Lion for LIBOR Transition – March 30, 2021
With essentially nine months remaining before issuing securities tied to USD LIBOR creates “safety and soundness risks”, regulators, government officials, and market participants strongly re-committed their efforts to a successful LIBOR transition. We highlight the key points of these developments below and track the progress of SOFR adoption in the securitization markets. Read more.
SFA Research Corner: After a Conscious Decoupling, Will There Be a Reconciliation? Unemployment and Credit Performance Post-COVID – March 16, 2021
Pre-COVID, consumer loan performance tracked unemployment closely. This relationship decoupled in 2020. “We have seen credit scores moving up following the onset of pandemic, largely reflecting more conservative use of credit and changes in reported delinquencies due to the presence of accommodations,” explains Emre Sahingur, head data scientist at VantageScore Solutions. As scores have plateaued, Sahingur warns, however, that a “a closer examination of the data reveals some early signs of reversing trends.” Consumer credit in a post-COVID environment will be discussed further at SFA’s March 18 webinar – Emerging From Suspended Animation – Consumer Credit and the Impact on ABS. We encourage you to join us as our panel of experts discuss the potential impact on ABS backed by auto loans and leases, credit cards, student loans and personal installment loans. Read more.
SFA Research Corner: The Electric Vehicle Market Charges Up – March 9, 2021
Car manufacturers have been adding full-electric and hybrid electric vehicles (EV) to their lineup to comply with global environmental regulations and to meet rising consumer demand. Pledges by major automakers to become fully electric as well as recent proposals from the Biden administration and lawmakers have the potential to meaningfully boost U.S. sales. For securitization, this could lead to an increase in stand-alone green auto ABS offerings or designated green buckets in traditional auto ABS deals, both of which would be welcomed by ESG investors. Read more.
SFA Research Corner: Calls for Consistent, Comparable Climate-Related ESG Disclosures – March 2, 2021
Over the past few weeks, the Federal Reserve, the SEC and the House Committee on Financial Services have addressed the challenges around climate-related disclosures. How these challenges are resolved in the broader markets will ultimately influence on how the structured finance markets address its own unique ESG-related reporting challenges, an effort led by SFA and its membership. Read more.
SFA Research Corner: Student Loan Forgiveness and ABS
– February 23, 2021
President Biden announced on February 16 that he was prepared to forgive $10,000 of federal student loan debt. While all borrowers of federal student loans would benefit to some degree, a blanket forgiveness of $10,000 would completely eliminate debt for over 15 million borrowers. The impact on ABS backed by FFELP loans will depend on the scope of loan forgiveness. Read more.
SFA Research Corner: An Executive Order Seeks to Lift Pall on ESG Cast by DOL Rule – February 9, 2021
The Biden administration will review a controversial Department of Labor rule that effectively dissuades employer-sponsored ERISA retirement plans, including 401(k) retirement plans, which holds an estimated $6.5 trillion in assets, from investing in ESG funds. The rule comes as the asset flows into ESG accelerate. We look at certain securitized products that can easily be included in the expanding ESG universe. Read more.
SFA Research Corner: Households Expect To Spend More in 2021 – February 1, 2021
The Federal Reserve Bank of New York’s Household Spending Survey reports that households expect their spending to grow by 3% in 2021, a sharp increase over the 2.2% reported August 2020 and the 2.4% in December 2019. The increase was broad based across education and income group. While this is welcome news for the economy, the outlook for certain business sectors will still depend on the course of the virus. Read more.
SFA Research Corner: Support for Households Continue – January 26, 2021
The Biden Administration has extended the payment moratorium on federally owned student loans for nine months. The executive order coincided with the FHFA’s announcement to extend Freddie Mac’s and Fannie Mae’s moratoriums on single-family foreclosures and real estate owned (REO) evictions until February 28, 2021. We expect both developments to have a positive impact on credit and consumer-related securitization overall. This month, we begin tracking the volume of securitized transactions indexed to SOFR. Read more.
SFA Research Corner: Checking on Household Health After a Stressful Year – January 13, 2021
With a most extraordinary year behind us, we check on the credit health of U.S. households. Household’s financial health drives demand for credit to make purchases and, along with employment, impacts a borrower’s ability to repay debt. The securitization markets look to these metrics and others to better understand consumer demand for credit and changes to credit risk, a particular concern given the unevenness of the recovery. Read more.
SFA Research Corner: Middle-Market CLOs Resilient in Early Days of Pandemic as Labor Market Point To Rough Days Ahead – December 7, 2020
Strong structures helped middle-market CLOs weather the early days of the pandemic even as underlying corporate obligors struggled through the economic slowdown. Although economic activity has started to resume, a slowdown or reversal will challenge these companies, many of whom relied on government and private sector loans. Recent labor data shows that the impact of the disruption may last longer than originally thought. Read more.
SFA Research Corner: Time to Take Off the Training Wheels? – November 23, 2020
On November 18, the Office of Financial Research (OFR) submitted its Annual Report to Congress. The 177-page report concludes that “significant downside risks to financial stability persist amid high uncertainty” and that “[t]here remains a striking contrast between the quick recovery of financial markets and the slower recovery of the economy.” We take a brief look at some of these risks and the potential impact on consumers, corporations, and securitization. Read more.
SFA Research Corner: Tightening Standards Continue Amidst Firming but Uneven Demand – a Look at the October Senior Loan Officer Fed Survey – November 16, 2020
We take a closer look at the results of the October Senior Loan Officer Opinion Survey on Bank Lending Practices. Lending conditions remain tight. Loan demand has turned positive in the consumer sectors but remains weak for businesses. Read more.
SFA Research Corner: Consumers May Find Themselves Between a Rock and a Hard Place – November 10, 2020
The combination of payment relief programs and unprecedented support through stimulus payments have kept loan delinquencies and defaults low despite elevated levels of unemployment. New data shows that while deferral programs were readily available and utilized at the onset of the pandemic, this is not the case today. If recent labor market gains slow with rising COVID-19 cases, and the likelihood of a generous stimulus package disappears with a split Congress, some borrowers may find themselves caught between a rock and a hard place. Impacted households forced to reprioritize their wallet may leave some lenders unpaid, a trend that we are starting to see in auto loans. Read more.
SFA Research Corner: The Road Back – Positive Macro Trends Support Auto ABS – November 2, 2020
Third quarter data shows that the economy is coming back strongly but rising COVID cases and the absence of another stimulus package threatens this trajectory. We look at recent macro developments and the impact this has had on auto financing. Read more.
SFA Research Corner: Joblessness and Credit Scores Improve as Consumers Buckle Down – October 26, 2020
A recent post from Liberty Street Economics shows that households have used more of their government stimulus and unemployment benefits to pay off debt and to build savings rather than on consumption. This shift in preference, if it continues, will have implications for the broader economy. Read more.
SFA Research Corner: Aircraft ABS Buffeted by COVID-19 Turbulence – October 13, 2020
The airline industry has been one of the hardest hit industries since the onset of the pandemic. While air travel has recovered from April’s low, passenger demand has remained depressed as passengers, airlines, and governments navigate quarantine mandates, staggered re-openings, and still rising COVID-19 cases. The downward pressure on cashflows have impacted aircraft ABS resulting in downgrades across the space. Read more.
SFA Research Corner: Macro Data Continues To Show a Slowing Recovery as Securitization Market Reports Strongest Month of Activity Since Onset of Pandemic – October 5, 2020
Troubling labor market trends persist even as unemployment rate improves for the fifth consecutive month. Meanwhile, new BEA data shows households retrenched in August in reaction to the expiration of supplemental unemployment benefits. These developments may weigh heavily on securitization going forward. However, for now, the securitization market benefits from robust new issue activity and still-strong investor demand. Read more.
SFA Research Corner: Corporate Bankruptcies Hit Highest Levels in 9 Years – September 28, 2020
S&P Global Market Intelligence reports that corporate bankruptcies totaled 470 between January and September 2020, the highest number of filings for any comparable period in the past 9 years. Of these, 36 were so-called mega-bankruptcies as these companies had more than $1 billion in liabilities at the time of filing. Consumer discretionary, industrials and energy sectors led bankruptcy filings. Read more.
SFA Research Corner – September 22, 2020
The Fed’s newly released Update on the Economic Well-Being of U.S. Households: July 2020 Results shows that Americans “experiencing employment disruptions were disproportionately likely to have difficulty paying bills, on average.” While data continues to show some real improvements in the labor market and federal financial assistance has provided much needed support to the unemployed worker, heightened uncertainty remains, as noted by Federal Reserve Chair Powell at the September FOMC meeting. Read more.
SFA Research Corner – September 14, 2020
Although the supply of new bonds overall is down by about one-third from 2019, a closer look at the underlying data shows that the decline across asset classes have been far from uniform with some niche sectors seeing strong activity. Read more.
SFA Research Corner – September 8, 2020
The headline unemployment rate fell to 8.4% in August as 1.4 million jobs were added. Improvements in the headline rate belie some troubling trends, namely a rise in the number of persons with permanent job loss and longer duration of unemployment. Read more.
SFA Research Corner – August 31, 2020
TransUnion’s Monthly Industry Snapshot shows the total percentage of accounts in “financial hardship” status dropped during the month of July, although remains well above pre-pandemic levels. Bankcards show the most decline, dropping 20%, and personal loans, the least, down 1.6%. Read more.
SFA Research Corner – August 3, 2020
Although the monthly enrollment rate has slowed significantly, the percentage of accounts in payment relief programs rose to unprecedented levels in May and remained at elevated levels in June. The take-up rate differs by asset class – mortgages, autos, and personal loans have higher participation rates than bankcards. Read more.
SFA Research Corner – July 28, 2020
As of July 21, the third subscription date, total TALF loan requests have reached $1.9 billion, with almost half of that going to finance the purchase of securitizations collateralized by loans made under the U.S. Small Business Administration’s 7(a) and 504 loan programs, which may include PPP loans. Loans for the purchase of CMBS, premium finance ABS (which are backed by loans to finance property and casualty insurance) and private student loan ABS comprise the remainder. Absent from this list are loans to purchase ABS backed by autos, credit cards, equipment loans and dealer floorplan loans as these sectors have recovered significantly since the end of Q1. Read more.
SFA Research Corner – July 20, 2020
CMBS delinquency rates ratcheted higher in June. Kroll Bond Rating Agency reports that the overall delinquency rate for KBRA-rated CMBS jumped 64% from 5% in May to 8.2% in June. While deteriorating performance has been expected, some commercial real estate segments have been impacted more than others. Read more.
SFA Research Corner – July 13, 2020
While re-openings have restored some jobs and incomes, the resurgence of the virus is having a negative impact on consumer demand. Read more.
SFA Research Corner – June 30, 2020
As of June 13, over 19.5 million Americans drew unemployment benefits. Since the enactment of the CARES Act in March, these benefits have been more generous in terms of quantity and duration. A person who files for unemployment today may be able to receive benefits until the end of the year. For some of those weeks, the unemployed worker will receive a substantially higher amount than what is received through regular unemployment benefits. These unemployment benefits and other government sponsored payments have had a substantial impact on personal income. If the jobs do not return to pre-COVID levels, what happens to the consumer when these programs expire? Read more.
SFA Research Corner – June 22, 2020
The COVID-19 pandemic continues to evolve rapidly. Traditional indicators that track economic and industry performance on a monthly or quarterly basis provide a less-than-complete picture of where we’ve been, much less of where we’re heading. As we enter a new stage of the pandemic, with new coronavirus cases rising and municipalities poised to implement new targeted shutdowns, we look at two high frequency data sources to better understand the impact of the pandemic on real economic activity. Read more.
SFA Research Corner – June 15, 2020
The ABS market continued its rally last week as some secondary market spreads approached the tightest levels of the year. For the first week of June, the primary market issued $6 billion of bonds financing a diverse mix of corporate and consumer loans. The jobs picture remains bleak, but improving. Weekly initial jobless claims show that another 1.5 million Americans became unemployed in the week ending June 6. On net, nearly 20 million jobs have been lost since February, according to Fed Chair Powell. The Fed expects the unemployment rate to fall to 9.3% by year end, from today’s rate of 13.3% (or 16.1% if misclassified unemployed individuals are included in the calculation). Read more.
SFA Research Corner – June 8, 2020
By far the biggest news last week was the surprising improvement in the headline unemployment rate, which dropped from 14.7% in April to 13.3% in May, thanks to the addition of 2.5 million jobs. The May headline better is far better than the expected consensus of 19.8%. Some of the disparity maybe explained by a misclassification of data; the BLS has noted that absent this misclassification the May unemployment rate would have been 16.1%. The secondary securitization markets continued to improve with the most liquid of the ABS asset classes returning to early-January levels and other asset classes continuing their march towards pre-COVID levels. Read more.
SFA Research Corner – June 1, 2020
April’s weak housing data reflects a market reeling from COVID-related demand shocks while April delinquency and forbearance data shows the effects of joblessness. Given the correlation between unemployment and the housing market and mortgage performance, any sustainable improvement will depend on how quickly and definitively jobs will come back, which is perhaps why the improvement in continuing claims, the first improvement since the pandemic outbreak, may be the first glimpse of the light at the end of the tunnel. Read more.
SFA Research Corner – May 18, 2020
Another 2.9 million Americans became newly unemployed for the week ending May 9. With output expected to remain constrained for the remainder of the year, high unemployment is likely until then, according to the Congressional Budget Office. High joblessness has pushed demand for new autos to new lows. Read more.
SFA Research Corner – May 8, 2020
After falling for 10 consecutive years, we are now facing a level of joblessness not seen post World War II. While the employment carnage is slowing – the current level of initial unemployment claims is less than half of the level recorded five weeks ago – the impact on consumer credit is just beginning to be revealed. Read more.
SFA Research Corner – May 1, 2020
With a few exceptions, the primary and secondary markets for TALF-eligible ABS continued to see improvements. CLOs, in particular, have been under pressure as rating downgrades on loan collateral reach new highs. New issuance reached $13 billion in April, a drop of 76% from one year ago. For the year, issuance across RMBS, ABS, CMBS and CLOs is down 30%. Read more.
SFA Research Corner – April 23, 2020
The conditions in the primary and secondary ABS markets continue to improve. We expect to see the impact of joblessness, forbearance and deferrals in ABS/ RMBS portfolios in the coming weeks. Read more.
SFA Research Corner – April 16, 2020
Announcing the inaugural edition of the Research Corner, where we track the performance on the consumer and business lending that our market finances and the economic impact of the structured finance industry, including market movements and macro signals that impact our members. Read more.