Sequoia Mortgage Trust 2013-1; Sequoia Mortgage Trust 2013-2; and Sequoia Mortgage Trust 2013-3. Sliced and diced packages of US home loans seem to be sprouting like the giant cypress trees after which the mortgage deals are named.
The recent spurt in issuance of these private-label mortgage-backed securities (MBS) has been a rare boost for Wall Street’s securitisation industry, which has largely been languishing in the years following the subprime and financial crisis.
Before the credit crunch that rocked markets in 2007 and 2008, private-label MBS dominated the US securitisation landscape.
Private-label means the loans backing the bonds are not guaranteed by the US government’s housing giants, Fannie Mae, Freddie Mac and Ginnie Mae. Because of that lack of government support, private-label MBS was – and still is – considered a more risky investment than the “agency” mortgage bonds that are backed and issued by Fannie and Freddie. In the boom years leading up to 2008, amid seemingly relentlessly rising house prices, banks nevertheless sold trillions of dollars worth of the securities to eager investors. In 2006, at the peak of housing euphoria, private-label MBS made up about 56 per cent of the $2tn worth of new mortgage bonds sold to investors.
The housing bust turned that proportion on its head – and more.
Since 2008, more than 90 per cent of mortgages written have been backed by Fannie, Freddie and Ginnie. It wasn’t until 2010 – more than a year and a half after the collapse of Lehman Brothers – that markets saw the sale of a private-label MBS deal.
Some securitisation specialists now see the potential for recovery of this market. Many banks are keeping more of the loans that they originate on their balance sheets; a potential first step to issuing private-label MBS. JPMorgan Chase is reportedly prepping its first private-label deal since the crisis.
Standard & Poor’s, one of the credit rating agencies hired by issuers to assess the riskiness of such bonds, says sales could pick up. Issuance totalled about $6bn in 2012 and S&P says that could rise to $15bn in 2013.
But optimism remains muted. Only a handful of issuers have been selling the deals so far. They include Redwood Trust, the Californian mortgage manager that makes the Sequoia deals and Swiss bank Credit Suisse.
The amount of private-label MBS being sold is also still far below the heady numbers seen before the credit crunch and looks likely to stay suppressed for some time to come.
That’s because politicians and regulators have yet to finalise many of the new rules they have suggested to help correct the excesses that contributed to the housing boom and bust. Those include new mortgage lending rules and a blueprint for the future of the US government’s housing giants.
As CreditSights analysts wrote this week, “it seems ironic that even though the origins of the credit crisis can be closely linked to weak residential mortgage underwriting standards, underscored by reckless subprime mortgage lending, the future structure of the mortgage market remains virtually unresolved after three years of broader efforts toward legislative and regulatory reform.”
It’s important to note that regulators are eager to see a revival of the private-label MBS market, albeit with stronger risk controls than pre-crisis. They want to take government mortgage support out of the equation and replace it with private capital sourced directly from the financial industry itself.
But until that regulatory uncertainty is lifted, sales of private-label MBS will languish.
In the meantime, Wall Street has been keeping busy by slicing and dicing other types of assets. Sales of bonds backed by commercial real estate loans have had their busiest starts to the year. Collateralised loan obligations, which pool together corporate loans, have come back from the dead. Bonds backed by an array of esoteric assets are also being snapped up by investors.
The current trends in the securitisation world are a nice illustration of what appears to be an increasingly immutable law of markets. When the growth of one type of financial business is limited, others shoot up to take its place. Kind of like weeds.
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