What Two Distinctive, Recent Deals Portend Becomes Clearer

More light has been shed in the past week on two recent notable deals in mortgage-related securities markets and their potential ramifications.

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The recent re-emergence of a nonperforming loan structure in the commercial market not seen in years does indeed appear to be a sign of revival in its market.

Also a structure in the residential mortgage market some considered covered-bond-like has been reframed as more of an innovation in the context of the insurance market.

Fitch issued a report last week indicating the nonperforming commercial real estate loan transaction previously noted in this publication, Rialto, could be the beginning of a trend.

The rating noted that a high volume of distressed CRE remains with servicers and lenders and there is increased use of loans sales in this area, particularly for smaller balance loans.

Putting a number on it, Fitch noted that since the first quarter of 2009, $161 billion of commercial mortgage-backed securities loans have been transferred to special servicing.

Approximately $77.7 billion of CRE NPLs that were "noncurrent" were on the balance sheets of Federal Deposit Insurance Corp. institutions as of yearend 2011, according to the ratings agency.

Fitch said it expects NPL transactions in the near term to start with investor purchases of troubled bank loan portfolios.

It noted that bank capitalization concerns and losses that heavily discounted purchase offers are no longer blocking transactions the way they did, as banks' capitalization may be relatively better.

Commenting separately on the other distinctive deal, which was done in the residential market by Prudential, Standard & Poor's director Gary Martucci clarified that while it is "considered by some investors to be a covered bond, it's not a covered bond."

However, he said in an online broadcast, "This is a unique structure as far as [U.S.] insurance companies are concerned. This is the first one I'm aware of that we've rated."

The "A" rating the deal received is based on the strength of the guarantor, Prudential Financial Inc., he stressed.

"To be clear, the rating does not reflect any reliance on the residential mortgage-backed securities that were deposited into the trust and that are expected to make the timely payment of interest and principal."

Martucci said the rating is based on a "corporate analysis" of the deal.

"If the assets don't perform, the guarantee from PFI comes through," he said, noting that the underlying certificates are owned by the Prudential Insurance Co. of America and that the company is "retaining a level of ownership" in the assets.

Martucci said, "There could be other bonds like this in the future" but his general impression that the need for such a structure was "specific to Prudential."

There was "a unique set of factors in play here that allowed Prudential to sell the…securities into the trust and take advantage of that sale," he said.

There could be "others in the future potentially, but I don't see [there] being a huge number of deals over the next couple of years," the ratings agency director said.