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THE STATE OF THE HOME EQUITY SECURITIES MARKET (AND HOW TO IMPROVE IT): REPORT FROM A RECENT CONFERENCE

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Abstract

In 1998, a year which saw the origination of a record volume of single-family mortgage loans, at least 12 of the top 20 home equity lenders experienced severe problems related to their business models, accounting practices, and access to the debt and equity markets. In march of 1999, Banc of America Securities (BAS) sponsored a conference to explore the causes of and possible solutions to these problems.

This article begins by tracing the industry's problems to lenders' inability to sell the subordinated and residual classes of home equity securities, and goes on to argue that the key to the regular distribution of these securities lies in enhancing the quality and depth of information that lenders provide investors about the underlying loans. The article discusses four proposals for improving lenders' disclosure—proposals that are designed to increase institutional investors' demand for home equity securities by helping them to assess the prepayment and credit risk associated with the securities.

Following the author's summary of the BAS proposals, the article concludes with selected comments on the future of the home equity securities markets by two panels of experts representing bond insurers and rating agencies.

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