DEC 13, 2012 12:24pm ET

B of A Jumbo-Deal Delay Shows Market on Life

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A delay of Bank of America Corp.’s return to selling mortgage securities shows the housing bust is still limiting the market’s revival.

Its Merrill Lynch unit has been considering since last month a plan to package hundreds of millions of dollars of U.S. jumbo home loans it had acquired into securities, said four people familiar with the matter. With the firm mired in litigation over mortgages sold during the boom, executives are cautious about doing a deal, said the people, who asked not to be named because discussions are private.

While issuance of private home-loan bonds quintupled this year to $3.5 billion and is forecast to rise by as much as ninefold in 2013, sales still pale in comparison to their peak of more than $1 trillion before the housing market slide starting in 2006. At stake in the nascent recovery are Wall Street profits, investor returns, homebuyer borrowing costs and the role of the government in housing finance.

“It would be a stretch to even call it reviving,” Jeremy Diamond, a managing director at Annaly Capital Management Inc., whose $142 billion of assets make it the largest real-estate investment trust that invests in mortgage bonds, said at an industry conference this month. “This year wouldn’t have even been a good month in any of the 10 years leading up to 2008.”

William Halldin, a spokesman for Charlotte-based Bank America, which bought Merrill Lynch & Co. in 2009 after acquiring top-ranked issuer Countrywide Financial Corp. in 2008, declined to comment on the potential transaction.

Costs from boom-era mortgages have helped send Bank of America stock down 46% from its 2010 high. It’s racked up more than $40 billion in costs from faulty foreclosures and sold-off housing debt and faces ongoing lawsuits from investors such as a class action suit led by the Iowa Public Retirement System.

The thaw in the nonagency market, for bonds without government backing, is being held back by the fallout from the global financial crisis it caused. Instead, programs backed by taxpayers are dominating originations, while banks are holding on to more mortgages as the weak economy limits other lending.

Investors and issuers also need to overcome lingering distrust of each other and the government, Jason Kravitt, a partner at law firm Mayer Brown LLP, said at the conference held last week by the Securities Industry and Financial Markets Association.

“It’s very hard to have a market where the principal investors are on a daily basis suing the principal issuers,” he said.

For the biggest banks, the potential legal and reputational threats and impact of pending regulations “are all challenges that they have to deal with today that weren’t that relevant in the past,” said Chris Hentemann, a former head of global structured products at Bank of America’s securities unit through 2007.

The bank’s hesitation to securitize the jumbo mortgages it bought “doesn’t surprise me at all really,” said Hentemann, now chief investment officer at hedge fund 400 Capital Management LLC.

Still, the market is growing. Next year, sales may reach $20 billion to $30 billion, according to JPMorgan Chase & Co. analysts. Separate securities that government-owned mortgage insurers Fannie Mae and Freddie Mac are being pushed to create to transfer default risks may fuel a further expansion.

Issuance peaked at $1.2 trillion in each of 2005 and 2006, fueling the housing bubble, before freezing in late 2008 amid a home-price crash that reached 35 percent by February. The slump contributed to a global recession and more than $2 trillion in losses at the world’s largest financial companies.

All of the nonagency bonds created since the crisis have been backed by so-called prime jumbo loans, which exceed the limits of government-backed programs, rather than the subprime and other risky mortgages that stoked the boom.

The role of Fannie Mae, Freddie Mac and other U.S. agencies has grown to account for more than 90% of new lending, in part because Congress expanded their upper loan limits, without dropping their base limits even as home prices fell. That’s helped to crowd out the private market. Guarantees offered by Fannie Mae and Freddie Mac cover loans of as large as $417,000 in most places and up to $625,500 in high-cost areas, down from $729,750 last year.

“The primary challenge is that Fannie Mae and Freddie Mac have such a dominant market share,” said Adam Yarnold, a managing director at Barclays Plc, the underwriter of $1.2 billion of 2012 deals.

The Federal Reserve also is helping to stifle a revival by driving down yields on their securities as it buys the debt to support the economy, he said.

The growth in nonagency issuance partly reflects investor willingness to accept lower yields on their top-ranked slices, according to Bill Roth, chief investment officer of Two Harbors Investment Corp., a REIT that’s been buying jumbo loans it may securitize. Credit-rating firms are also easing their toughened standards a “little bit,” he said.

Redwood Trust Inc., the REIT that was the only issuer during the past two years, was joined this year by Credit Suisse Group AG. They also may be followed by Shellpoint Partners LLC, the lender whose owners include market pioneer Lewis Ranieri’s Ranieri Partners, and EverBank Financial Corp.

“We’re planning on becoming an issuer next year, and we’re bullish of the opportunity that lies in front of us,” said Joseph B. Long, an executive vice president at EverBank, whose home-loan unit is run by Tom Wind, the former residential- lending head at Lehman Brothers Holdings Inc. 

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