07/30/2010

Whole-Loan Trading Buoys MBS Outlook

Mortgage-bond professionals are taking a recent uptick in whole-loan trading volume as an encouraging sign for their side of the business.

After a number of fits and starts, market players think the latest increase in loan sales could be what finally lifts securitizations of non-agency mortgages out of their issuance slump. That's because it promises to ease one of the main hindrances to dealflow: a lack of available collateral.

The activity has been driven by a number of key players. Small banks have sought to sell their holdings. Wall Street institutions, including Bank of America, Credit Suisse, Deutsche Bank and Goldman Sachs, have stepped in to offer financing. And new investment vehicles are taking shape at Biltmore Capital, Dreambuilder Investments, MCM Capital and elsewhere.

The sales have involved both performing and nonperforming mortgages. In many cases, they are coming from banks that chose to sit on those assets as values declined earlier in the financial crisis - but now feel their financial situations have improved to the point where they can afford to crystallize losses by unloading the holdings. Many of the pools total $5 million to $30 million, although some have been as large as $300 million.

"You're starting to see smaller pools being sold by some of the smaller banks," said Elton Wells, who heads the structured-product division of illiquid-asset exchange SecondMarket.

Meanwhile, the likes of BofA, Credit Suisse, Deutsche and Goldman have shown an increased willingness to extend warehouse lines to mortgage lenders and buyers alike. The thought is that the institutions wouldn't be doing that unless they thought it would lead to securitization-underwriting assignments later on. "They are all hoping and planning for it," one source said.

At the same time, Biltmore, Dreambuilder, MCM and other fund managers are raising money for vehicles that would buy nonperforming mortgages, with securitization as a potential exit strategy. They join a host of distressed-mortgage funds that began cropping up in late 2007 - entities that until now have faced a shortage of supply as both whole-loan trading and fresh originations languished.

Biltmore recently landed a $20 million commitment for its Biltmore Capital Holdings 2, bringing the vehicle's overall equity pool to $27 million. It's seeking to raise $50 million altogether, and is set to begin investing in 4-6 months. The firm pays an average of 60-65 cents on the dollar for delinquent credits of $200,000 to $300,000 in the mid-Atlantic region and Texas. Dreambuilder is just hitting the road with a fund of undisclosed size. And MCM began talking to backers earlier this year about an entity called MCM Capital Homeowners Advantage Trust 3.

In each case, the plan is to get borrowers to resume payments via loan modifications, and then unload the accounts through securitization, refinancing or whole-loan sales. Or they could foreclose.

On the performing-loan side, some of the same investment banks that are offering warehouse financing are positioning themselves as buyers. Securitization is atop their list of exit strategies. Separately, Cantor Fitzgerald, Credit Suisse, Goldman and RBS are among shops thinking about forming so-called mortgage conduits that would routinely absorb and securitize mortgages (see article on Page 1).

Citigroup and Wells Fargo are seeking mortgage traders to handle the added volume and potentially find credits for in-house deals. So is Apollo Management, which is in the process of forming a bank.

The extent of the mortgage-trading pickup is difficult to measure, and prices vary widely due to variations in loan characteristics. In general, the best-performing accounts trade for $1.01-$1.02 on the dollar, while performing alternative-A credits are going for 90-95 cents. In locales where home values have been particularly hard-hit, even performing credits are commanding just 77-83 cents, while nonperformers are going for 50-70 cents. In some cases, the buyers paying those prices would be looking at mortgage bonds instead - if there were any to be had.

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