“Pre-crisis, my core business, the multi-trillion dollar private-label MBS market collapsed abruptly in 2008 and has not recovered 7+ years later.” Mike Perry, former Chairman and CEO, IndyMac Bank
January 18, 2016, Joe Light, The Wall Street Journal
Market for Private-Label Mortgage Bonds Is Recovering, but Slowly
Sales of bonds that helped spark financial crisis are selling at quickest pace in five years
By Joe Light
Sales of the bonds that helped spark the global financial crisis are selling at their quickest pace in five years. But investors and analysts say what is surprising about the market for so-called private-label mortgage-backed securities isn’t how strong it is, but how moribund.
Financial institutions issued $61.6 billion in private mortgage bonds in 2015, up from $54.1 billion in 2014 but a fraction of the $1.19 trillion issued at the peak of the housing boom in 2005, according to new data from Inside Mortgage Finance, a trade publication.
What’s more, most of 2015’s new mortgage bonds weren’t formed out of new loans but rather out of repackaged old loans, underscoring how few new mortgages are being securitized, said IMF publisher Guy Cecala. “The market’s on life support,” he said. More than seven years after the financial crisis began, bond issuers, ratings companies and the government are struggling to revive the private-mortgage-bond market.
Private mortgage bonds helped drive the growth of risky mortgages in the run-up to the financial crisis and often carried high ratings even though the underlying loans were to borrowers with shaky credit, unverified incomes and tiny down payments.
Few in the mortgage industry want to see the riskiest loans return, but they do want to see private investors take on a greater role. Right now, the vast majority of mortgage bonds are guaranteed by the government through mortgage-finance companies Fannie Mae, Freddie Mac or agencies.
Many of the new securities are merely repackaged. For example, in November, Fitch Ratings issued ratings on four bonds packaged by Nomura that were made up of mortgage securities originally issued by now-defunct bankWashington Mutual.
During the crisis, some investors felt burned by bonds that weren’t as safe as believed and by mortgage servicers they felt didn’t always have their best interests at heart.
To help reconstruct the market, officials from the U.S. Treasury Department over the past year and a half have brought together lenders, investors, ratings firms and other stakeholders to devise new deal terms that the parties are comfortable with.
But some analysts say that the private mortgage bond market’s biggest hurdle right now is that lenders think they can make more money by hanging onto loans themselves rather than by securitizing them and selling to investors.
Apart from the repackaged bonds, most postcrisis private-label securities have been filled with so-called jumbo mortgages loans to high-quality borrowers. Large banks such as Wells Fargo & Co. and J.P. Morgan Chase & Co. lately have been happy keeping such loans on their balance sheets, restricting the supply available for securitization, said Andrew Davidson of mortgage-analytics company Andrew Davidson & Co.
On the opposite end of the credit spectrum, lenders have had trouble finding a sweet spot of borrowers who don’t fit the requirements of government-backed mortgage programs and yet still are low-risk enough to be attractive to investors and meet new federal mortgage rules.
Angel Oak Mortgage Solutions in December issued $135 million in subprime-mortgage-backed securities in which borrowers paid an average rate of 7.5% but had an average credit score of 683 and down payment of 28%.
In comparison, the Federal Housing Administration backs loans to borrowers with credit scores as low as 580 and down payments of 3.5%.
“I don’t know if we will ever go to the limits of when the music stopped” during the boom, said Angel Oak head of capital markets John Hsu. “Clearly that was not a place where the industry should have gone.”
Some private investors say they want to take on more mortgage-credit risk, but are having trouble finding ways to do it. Some investors as a result have turned to new securities issued by Fannie Mae and Freddie Mac that in effect sell some of the government’s mortgage-credit risk.
Money management firm AllianceBernstein L.P. invests in the Fannie and Freddie securities, but because of the lack of a private-label market has also turned to buying whole mortgage loans directly from lenders, a relatively cumbersome process that requires the firm to take on some of the responsibilities of managing the loans, said head of securitized assets Michael Canter.
“We want to have more mortgage credit risk in our portfolios,” Mr. Canter said. “It’s only because of [the PLS] breakdown that we had to venture into the whole loan space.”