Shellpoint Partners LLC, the lender backed by mortgage-bond pioneer Lewis Ranieri, cut the size of its second sale of U.S. home-loan securities without government backing after delaying the transaction last month.
The bonds are now tied to $250.8 million of loans, Kroll Bond Rating Agency said in an emailed statement. The issuer had earlier called for the deal to be backed by $308.6 million of loans, the credit grader said last month.
Kroll’s revised presale report didn’t reference loans to foreign nationals without credit scores, debt that had been cited as representing 1.2% of the pool in the previous report, signaling the mortgages were dropped to help draw investors. The deal also reduced the share of loans from California to 50% from 58%, while increasing the ratio of debt poised to get top ratings.
The changes show that investors remain wary of the default risks of the safest portions of nonagency mortgage securities, after the debt helped fuel the worst financial crisis since the Great Depression. The notes can also be harder to trade than government-backed bonds and carry projected lives that can extend with rising interest rates.
Eric Kaplan, a managing director for New York-based Shellpoint, declined to comment.
Earlier this week, Kaplan co-hosted a roundtable in New York organized by the Structured Finance Industry Group that represented an effort to accelerate the market’s revival by reducing mistrust among market participants. Investors, issuers and others discussed contract terms related to when and how lenders or other mortgage-bond sellers can be forced to repurchase loans that fail to match their promised quality.
While nonagency issuance has grown this year after halting five years ago amid tumbling home values and soaring defaults, sales have slowed since July. About $12.5 billion in deals tied to new loans have been completed this year, up from $3.5 billion in all of 2012, according to data compiled by Bloomberg.
Sales in 2013 probably won’t surpass $15 billion, though they could exceed $50 billion next year, especially if the government cuts the size of mortgages that federally backed Fannie Mae and Freddie Mac can guarantee, according to a Barclays Plc report last week. Issuance peaked at $1.2 trillion in each of 2005 and 2006.
Deals since the nonagency market restarted in 2010 have been tied to prime jumbo mortgages, rather than riskier subprime and alt-A loans. Loan-to-value ratios in the latest Shellpoint offering average 65.5% with a mean borrower credit score of 773, according to the Kroll report.
A 65.5% ratio means a homebuyer used a 34.5% downpayment or a borrower had similar equity when refinancing. Credit score cut-offs for subprime loans, made to borrowers with poor credit histories, range from 620 to 680.
Kroll said it expects to grant its highest rating of AAA to $233 million of the notes with credit enhancement, or default protection, of 7.1%, compared with $285.3 million and 7.9% under the original structure.
Investors are showing appetite for some types of mortgage credit risk. Fannie Mae this week sold $675 million of notes with less default protection, completing the deal at lower yields in excess of benchmark rates than initially offered. Credit Suisse Group AG said in a report that the debt appreciated in secondary trading.
Jumbo home loans are ones larger than allowed in government-supported programs, currently as much as $729,750 for single-family properties in high cost areas. For Fannie Mae and Freddie Mac loans with the lowest costs for most types of borrowers, limits range from $417,000 to $625,500.
Origination of jumbo loans for securitizations is being reduced by higher rates and by investors demanding higher relative yields on the bonds, Stanford Kurland, chief executive officer of PennyMac Mortgage Investment Trust and former president of Countrywide Financial Corp., said in an August conference call. The firm completed its first mortgage-bond deal last month.
Some banks have also been offering the loans at rates even lower than available on traditional loans. In a report last month, JPMorgan Chase & Co. analyst John Sim cited competition from “asset-starved banks” in cutting his 2013 issuance forecast to “closer to” $15 billion, from $20 billion.
Shellpoint offered its first mortgage-backed securities in June. The company also restructured that transaction, and then offered higher relative yields to attract investors.