The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site. Please see our Subscription Terms and Conditions.

All material subject to strictly enforced copyright laws. © 2022 Euromoney, a part of the Euromoney Institutional Investor PLC.

Batten down the hatches in US mortgages

Data on the US housing market spells bad news for ABS CDOs this year.

The US home equity loan market has long been a fertile source of assets for ABS CDOs, offering a nice boost to yields in an otherwise frustratingly tight spread environment. But recent data from Moody’s and Lehman Brothers reveal that projected HEL rating actions in 2007 will almost double those since 2003, and those actions are all in one direction - down. Lehman is expecting about 700 downgrades of triple-B minus rated HEL notes in a 5% house price appreciation (HPA) environment and 1,000 downgrades if HPA is zero. The stark news for the industry is that the majority of mezzanine CDOs outstanding will likely experience downgrades in their portfolios in 2007. Roughly 20% of the sector has exposure to bonds deemed highly likely to be downgraded by 10% or more. It is interesting that the pain will not be confined to 2003 and 2004 vintages but will also be felt in relatively unseasoned 2005 and 2006 vintages. The downgrades are unlikely to result in trigger failure but might mean that a haircut will be applied to the par value of the asset when calculating the overcollateralization coverage test. This will have a sharper impact on the more recent vintages as the older deals have sufficient OC cushions to absorb the impact.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.


Unlimited access to and

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually


Unlimited access to and, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors


Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree