The long-awaited return of an active jumbo mortgage-backed securities market is going to have to wait a little longer.
This is still the best year since the downturn by far for securities backed by mortgages too large to fall within the government-sponsored enterprises’ loan limits.
Jumbo MBS issuance is near $12 billion and eight issuers have brought deals to market this year, according to Fitch Ratings data. Only two issuers brought deals to market in 2012. Issuance only reached roughly $3 billion to $4 billion last year.
The private-label residential MBS market is having a tougher time moving ahead now. Shellpoint Partners LLC’s
Speculation that the Federal Reserve will end its rate-lowering purchases of $85 billion in bonds per month is a key reason issuance has gotten tougher, as well as the reason the Shellpoint deal fell apart.
The speculation reversed market expectations that rates were more likely to remain low than move higher. This hurt the value of jumbo MBS.
Holders of jumbo MBS issued before the change in rate expectations “lost a certain amount on their securities,” says Scott Gibson, senior vice president, MountainView IPS. This is because their yields were lower than the new market rates, he says.
The losses were moderate. Securitization has been able to continue but has become slower and more challenging, say Gibson and Robert Wellerstein, managing director, MountainView Capital Group.
Market consensus still is that rates will go up eventually even though recent Federal Reserve minutes show officials want to continue the monthly bond buying for now, Wellerstein says.
Other uncertainties also have contributed to make issuance challenging, notably the stronger whole loan bid in the case of the Shellpoint deal.
“There is a substantial pricing disconnect between the whole loan and new issue RMBS secondary markets,” according to Shellpoint.
Shellpoint declined to comment on the exact pricing involved and it is challenging to uncover through other means in this case.
Shellpoint had been preparing to issue the deal, Shellpoint Asset Funding Trust 2013-2, under the Securities and Exchange Commission’s Rule144A. Rule 144A limits required public disclosure. Whole loans “are traded from one entity to another without necessarily the light of day,” says Wellerstein.
The whole loan bid is stronger than the securitization bid, but whole loan trades are relatively scarce and vary, says Wellerstein, whose company brokers whole loans and other mortgage assets. “There is not a lot traded consistently,” he says. “We don’t have a lot of specific prices to compare whole loans to securitization. We hear certain entities, like Shellpoint, have pulled back from securitization.”
Generally, large banks like Wells Fargo and JPMorgan Chase dominate jumbo originations as they like to maintain customer control and can hold the loans in portfolio rather than sell them. This limits whole loan trading, Wellerstein says.
One or two smaller banks that want to bolster shrinking loan portfolios typically end up buying whole loan portfolios that go up for bid, he says.
The shift toward higher rates this year has caused origination volumes to fall as mortgages have become less affordable. This has implications for the securitized market as well as whole loans.
The decline in origination has caused the growing field of issuers to include a wider range of mortgages in their deals even though investors prefer more standardization.
Shellpoint downsized SAFT 2013-2 and removed loans with higher risk profiles prior to deciding to sell it as whole loans, according to multiple sources familiar with the deal, who did not wish to be identified. These were loans made to borrowers in other countries buying homes in the United States. These loans carry additional risk because, among other things, the subject property is in one country’s legal jurisdiction and the borrower is in other another country’s jurisdiction. This contributed to Shellpoint’s decision to shift its execution strategy for the deal.
Securitizations and whole loans face some of the same challenges but there are differences that could account for a stronger whole loan bid as well as why securities issuance has slowed.
“It is impossible to say all the reasons, but the costs involved in securitization are pretty expensive at this point. Underwriting and legal expenditures have increased in recent years to a high level,” he says.
“Investors may be required to take a higher risk weighting for securities than for whole loans” under accounting rules like the new Basel III international accounting standards, Gibson adds. Assets with higher risk weightings require more capital.
Securitizations do have advantages over whole loans that need to be weighed against such disadvantages. Jumbo MBS can be easier to sell than jumbo whole loans, for example.
Issuers are still interested in the securitized jumbo market, but deals will be slower than they were earlier this year. The withdrawal from a deal by Shellpoint, which is influential mortgage-backed securities market pioneer Lewis Ranieri’s company, shows that.
“The biggest thing is the unknown with these securities,” Gibson says. “I think once we get past some of these uncertainties, issuance will continue to pick up.”
