Moody’s reckons asset-backed securities (ABS) issuance in the US in 2005 will equal or slightly surpass the $623 billion of public term ABS issuance seen in 2004.
“Market participants forecast the economic momentum that began in mid-2003 will continue in 2005 with moderate economic growth and resulting modest increases in interest rates that will likely slow issuance in the home equity sector while vehicles and credit cards are projected to have a strong year,” says Moody’s analyst Kent G. Becker, author of a new report.
Home equities are expected to remain the largest asset class, followed by vehicles, credit cards, and student loans. The flat-to-slightly higher 2005 projected issuance level compares to a 45% increase in 2004 and a 25% rate of growth in 2003.
Based on a survey of issuers, issuance ranging between $325-$360 billion should come to market in the home equity sector, down approximately 10%-20% from 2004, says Moody’s. A slowdown in property price appreciation and increases in interest rates will likely dampen volume based on fewer re-financing incentives and increased mortgage payments on purchase money transactions.
“In manufactured housing, Moody’s expects securitization volume to be similar to 2004-under $1 billion-given high credit enhancement levels, which have made accessing the ABS market uneconomical for most issuers,” Becker says.
Turning to vehicles, Becker says “public issuance of vehicle-backed securities will be between $82 billion and $90 billion, a double digit growth rate over 2004. The volume projection, based on information received from sponsors, represents a return to a more active participation in the public ABS markets. Drivers of 2005 issuance growth are expected to be the prime and subprime and near-prime auto loan sectors. These two sectors, which together accounted for approximately $57 billion, or 76% of the $75 billion of vehicle-backed ABS issued in 2004, are each projected to grow by approximately 25% in 2005.”
In the credit card sector, says Becker, “we expect a 17%-30% increase in volume to the $60 billion to $66 billion range, although this may be tempered by further industry consolidation,” he says. “Issuance of public student loan ABS is likely to decline by 7%-16% to approximately $49-$54 billion in 2005. One of the reasons for the decline is that Sallie Mae, the largest student loan ABS issuer, in 2004, finished securitization of approximately $75 billion of student loans previously funded on its balance sheet.”
US public ABS issuance in 2004 totaled $623 billion, up 45% over the previous record of $430 billion established in 2003, and up 80% over 2002 issuance. The volume increase in 2004 was led by home equities, with student loans posting an increase as well. “The increase in issuance was primarily due to low interest rates resulting from previous Federal Reserve rate cuts, which created an attractive borrowing environment,” says Becker.
In 2004, home equity issuance totaled $400 billion, easily shattering the previous record of $199 billion set a year earlier. “Historically low mortgage rates, improving economic conditions, and appreciating property prices were the main drivers of the record issuance,” notes Becker.
Credit card issuance last year was $51 billion, a decline from 2003, because of a combination of several factors including the persistence of low interest rates, continued consolidation of issuers, and the relative attractiveness of home equity borrowing.
Last year, student loan issuance was up 30% reaching $58 billion. The bulk of the issuance consisted of securitizations of pools of predominately Federal Family Education Loan Program (FFELP) student loans, with the additional issuance provided by alternative, i.e., non-government guaranteed student loans.
The report is titled, “2004 Review and 2005 Outlook: US ABS 2005 Issuance Projected to Match Robust 2004 Total.”