Banks Warm to Mortgage Bonds That Burned Them in 2008
September 16 2019 - 5:59AM
Dow Jones News
By Ben Eisen and Telis Demos
Banks are getting back into the business of building mortgage
bonds, laying the groundwork for a market that stands to grow as
the Trump administration tries to reduce the government's role in
housing finance.
Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co.,
and JPMorgan Chase & Co. over the past year have restarted or
expanded the business of spinning fresh pools of mortgages into
securities.
They are adding a jolt of energy to efforts to revive the
so-called private-label market for mortgage bonds, which virtually
disappeared after it blew up during the financial crisis of 2008.
Smaller operators have long tried, but mostly failed, to rebuild
what was once among the most significant businesses on Wall
Street.
Last year, some $70 billion of mortgages ended up in
private-label mortgage bonds, according to the Urban Institute.
Though that is far below a peak of more than $1 trillion in
precrisis years, it is the most since 2007. And this market could
continue to grow if Fannie Mae and Freddie Mac shrink, traders and
executives say, opening up more room for private players to take
over this middleman role of packaging and selling mortgages. The
Trump administration this month proposed privatizing the two
government-sponsored mortgage giants, and the administration is
expected to shrink them even if it can't return them to private
hands.
The fact that many investors say they are once again getting
comfortable buying these bonds also underscores the broader
market's search for yield. Instead of viewing these bonds as toxic
reminders of the financial crisis, many money managers see them as
an opportunity to generate more income in a low-rate world.
Fannie and Freddie don't make loans. Instead, they buy
mortgages, package them into securities and sell them to investors.
Investors view these securities as safe because the
government-backed mortgage giants assume much of the default risk.
The bonds packaged and sold by the banks don't have the same
protection, so investors demand higher yields to compensate them
for taking on more risk.
Many banks soured on making mortgages after the financial
crisis. Today, the majority of U.S. mortgages are made by nonbanks,
which are less regulated than their bank counterparts and sometimes
thinly capitalized. Even so, banks still see an opportunity to make
money by supporting the infrastructure that underlies the U.S.
mortgage system.
Citigroup, for example, recently purchased a pool of 932
mortgages from a nonbank lender called Impac Mortgage Holdings Inc.
and used them to back bonds worth more than $350 million. The deal
closed last month.
While some banks never fully extricated themselves from the
private-label market, they typically issued bonds in the years
after the crisis only to package odds and ends, such as old loans
that had defaulted and been modified in some way. Some deals were
done to help out important clients.
What is different now is that banks are also stepping into the
role of buying loans from third parties and underwriting the
securities they piece together. This more closely resembles the
precrisis days when banks would bid on loans that were up for sale
by the lenders that made them.
Banks today are buying both mortgages that are eligible to be
sold to Fannie and Freddie as well as ones that aren't because they
are too large or they are considered riskier -- often because they
use alternative documentation to approve the borrower.
These are baby steps back into the market, to be sure. Largely
gone are the complex derivatives once overlaid on these deals. And
the market is tiny compared with precrisis days: In the first half
of this year, 2.1% of mortgages went into private bonds. That is up
from 2009, when private-label issuance was virtually nonexistent.
But private bonds made up 41% of the market at a peak in 2005,
according to the Urban Institute.
One problem with precrisis deals was that data about the
underlying mortgages was often difficult to come by, even for the
bankers originating the deals. In the Impac deal, Citigroup is
working with startup dv01 Inc. to provide data to investors about
the underlying mortgages, according to a report by ratings firm
DBRS Inc.
JPMorgan restarted its private-label program several years ago
but has recently broadened it. In April, the nation's largest
lender by assets did a deal with a group of its own mortgages that
didn't qualify to be bought by Fannie and Freddie.
Wells Fargo introduced its first postcrisis deal last October
and has done more since. Goldman Sachs, which did one deal in 2014,
stayed out of this market until March, but since then has done
three deals. Bank of America Corp. hasn't reintroduced its own
mortgage bonds, but aggregates loans that are issued through
Chimera Investment Corp., a real-estate investment trust, according
to people familiar with the matter.
Write to Ben Eisen at ben.eisen@wsj.com and Telis Demos at
telis.demos@wsj.com
(END) Dow Jones Newswires
September 16, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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