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US sub-prime: ABS CDO pipeline dries up as sub-prime fears start to bite

Hysterical headlines and wild index swings have disguised what is really going on in the world of home equity loan securitization.

There has only been one topic of conversation in the structured finance market in recent weeks – and for once it was the same subject that everyone else in the financial markets is talking about – US sub-prime mortgages. Problems at originators such as HSBC, Fremont, Accredited Home Lenders and New Century Financial have generated negative headlines around the world. As far as the structured finance market is concerned, the key issues are what will be the impact on existing and future ABS and CDO transactions?

For most banks the whole rationale for origination of sub-prime mortgage loans is predicated on the ability to shift much of the credit risk to the capital markets – indeed, HSBC’s problems partly stem from the fact that Household Financial Corp had not securitized a large portion of its exposure. But even the houses that have been big securitizers and originators of this collateral – such as Lehman, Bear Stearns and Merrill Lynch – were originally thought to be facing serious problems. These concerns stemmed from the belief that they might have retained residual interest in those securitizations, and also have large mortgage warehouse lines that would need to be seasoned before they could be repackaged into a securitization.

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