Today Bloomberg’s resident mortgage backed securities (MBS) expert Jody Shenn reported on a Deutsche Bank study showing 2012 MBS issuance has more than tripled to $7.4 billion, broken down as follows:
Notes sold in so-called non-agency securitizations of new loans, all of which were prime “jumbo” mortgages, reached $3.2 billion, Deutsche Bank analysts Ying Shen and Jason Wu wrote today in a report. Sales tied to older mortgages totaled $2.4 billion, while securities backed by non-performing debt were $1.8 billion. Issuance fell 13 percent last year to $2 billion. While far from the $1.2 trillion issuance peak in each of 2005 and 2006, sales by Redwood Trust Inc. and Credit Suisse Group AG of new-loan bonds have lifted the total from less than $700 million last year as buyers seek higher returns after Treasury yields reached record lows.
This is a hot topic now and will continue to be in 2013. In a piece called The Big Long (a play on Michael Lewis’ MBS meltdown book The Big Short, in which Deutsche was prominently featured) The Economist wrote Saturday how, now that home prices are rising or at least stabilizing, investors are seeking yield from MBS pools that were once considered toxic:
Mortgages not guaranteed by the government, known as “non-agency”, are far more volatile and thus more appealing to return-hungry investors. Their price is closely correlated to that of the houses which underpin their value. Repayments are also higher when house prices are buoyant: if the house is worth less than the mortgage, the owner may simply walk away. Picking up those mortgages at rock-bottom prices has delivered returns of 30% or more for savvy hedge funds this year.
Certainly an interesting trade on but it’s going to play out soon enough because it involves legacy loan pools. So the focus will start shifting to the new non-agency loans being originated and securitized. “Non-agency” in this context is just a fancy way of saying jumbo mortgages above the $417k-$625k limits that Fannie & Freddie will buy. Because of the high concentration of jumbo originations in my core markets, I’ve been watching this trend play out from ground level as the investor appetite for new jumbo mortgages grows.
For consumers this means lower jumbo mortgage rates as liquidity continues to return. For investors, this means much more issuance on new jumbo originations as the CFPB provides further clarity on how much risk originators of jumbo mortgages must retain.