Academic journal article ABA Banking Journal

Securitizations and Whole-Loan Sales Provide Wheel-and-Deal Room

Academic journal article ABA Banking Journal

Securitizations and Whole-Loan Sales Provide Wheel-and-Deal Room

Article excerpt

Never before have the individual players in the auto-lending community enjoyed such flexibility in funding as they do today. Whatever their market, a wide variety of funding avenues exists to enable them to keep up with consumer demand--and to compete.

Not so long ago, the lines dividing the types of players in the auto market were hard and fast. Captive and independent finance companies funded their operations by issuing commercial paper. Large banks tapped the money markets, plus deposit funding, to fuel their loans. Community banks had little choice but to use local deposits, as well as a smattering of purchased money.

Today, while these traditional funding measures still survive, they have been joined by new opportunities.

The nation's securities markets have demonstrated a willingness--even eagerness--to buy securities backed by auto loans and leases. Once a tentative matter for many, such securitization has become a staple.

At the same time, willing buyers are ready to purchase packages of whole loans from lenders who often find a better execution than in the securities markets for funding.

Increasingly, in this new environment, the question when a borrower wants to buy or lease is no longer "if" credit will be granted, but "how" the loan will get made and "how much" the credit will cost.

SECURITIZATION: FROM "WOW" TO "NOW"

Securitization has long been a staple of the mortgage markets. But until the mid-1980s the nation's banks had not embraced the concept for other types of credit. Then, a handful of institutions gave it a try, among them Arizona's Valley National Corp.

As recounted in the August 1986 ABA Banking Journal,, Valley National in 1985 launched the second securitization of consumer-loan receivables to finance expansion of its auto-lending business. It had been beaten out by hours by a Marine Midland offering, but Valley topped Marine by offering a larger package--$100 million in auto receivables.

Valley's offering was underwritten by First Boston Corp., which was pioneering the deal for Wall Street. Because the use of the technique was so new to the markets for a consumer asset, First Boston had insisted on packaging "seasoned" loans--those with more than a year's record, on average.

At the time, in banking circles, the banks' strategy was nothing short of revolutionary. Valley, for instance, not only locked in several hundred basis points of spread, but also had found a way to remove millions of dollars in assets from its books. From a strategic viewpoint, the bank had been able to tap the capital markets, rather than local deposits, for funding.

At the time, some predicted that widespread securitization of auto loans and other assets would never fly until the federal government copied the mortgage market example of forming specialized agencies--such as Freddie Mac or Fannie Mae.

How wrong they were. In recent years auto-loan-and-lease-backed securities have accounted for roughly one-quarter of the nonmortgage-backed portion of the burgeoning asset-backed securities market.

In the first half of 1997, issuance of auto-loan- and auto-lease-backed securities was up 11% over the first half of 1996, according to BankAmerica Securities Inc., Chicago. The bank-owned securities firm reported that dollar volume for the first half of 1997 had reached $13.6 billion--quite a bit larger than Valley's fledgling $100 million effort in 1985. And that first-half total comprised 29 deals all told--15 by independent finance companies, seven by banks, four by thrift institutions, and three by captive finance companies. Many of those packages were substantially larger than the Valley package--the largest of all being GMAC's $1.4 billion package of April, and the largest among the banks' being Chase's $1.2 billion package of March. Among the other players issuing securities in the first half were Banc One, Chevy Chase, KeyCorp, First Security, Arcadia, Advanta, and Toyota. …

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