Investors’ rekindled passion for sales of private mortgage securities is cooling.
Yields on $397.3 million of top-rated securities sold yesterday by Redwood Trust Inc. were 175 basis points more than benchmark swap rates, up from 170 basis points on bonds it sold earlier this month and 97 basis points, or 0.97 percentage point in January. Sales this year of home-loan bonds without government backing have already surpassed the highest annual total since the debt sparked the global financial crisis.
“Suddenly, in the last couple of months, the love has dissipated” as investors demand to be paid more relative to so-called agency bonds, said Brad Friedlander, a managing partner at Atlanta-based Angel Oak Capital Partners, which oversees about $2.5 billion.
The growing pains come as privately issued bonds begin to recover market share from the government-backed securities that have accounted for more than 90 percent of lending since 2008. The bonds have all been backed by jumbo loans that exceed the limits for taxpayer-supported guarantors Fannie Mae and Freddie Mac, so the primary competition in that market has been banks holding the loans on their books.
Issuance of non-agency mortgage securities so far this year has been tied to $5.2 billion of new loans, up from $3.5 billion last year and less than $700 million in 2011, according to data compiled by Bloomberg. Sales peaked at $1.2 trillion in both 2005 and 2006 before collapsing as their prices tumbled amid soaring foreclosures and plunging real-estate values.
Wider Spreads
Wider spreads on new bonds may slow issuance by making it more attractive for banks to retain jumbo mortgages, according to Credit Suisse Group AG analysts led by Chandrajit Bhattacharya. The firm forecast in a report yesterday that sales may approach $15 billion this year.
The rising relative yields may also postpone the day when private bond issuers will be able to compete with Fannie Mae and Freddie Mac for smaller loans. The two companies have been increasing their guarantee fees as their overseer tries to reduce their role in lending.
Redwood Chief Executive Officer Martin S. Hughes and Chris Katopis, executive director of the Association of Mortgage Investors, said at a Congressional hearing this week that in addition to competition from the government, the private mortgage-bond market is being held back by unresolved issues tied to its collapse, including unfinished regulations, investors’ distrust of lenders and the government, perceived conflicts of interest at loan servicers and the ability of borrowers to reduce their home equity with second loans.
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