Banks warm to mortgage bonds that burned them in 2008 – By Ben Eisen and Telis Demos (Wall Street Journal) / Sept 16 2019
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.
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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.
