05/20/2011

Goldman Sprints Ahead With Conduit Plans

Goldman Sachs has taken the pole position among banks racing to set up mortgage conduits.

Goldman has been stockpiling jumbo mortgages at a rate that far exceeds the buying activity of Bank of America, Barclays, Credit Suisse, RBS and other banks that are trying to revive their once-active conduit businesses. In doing so, Goldman appears to have gained the inside track to issue what would be the first securitization resulting from the efforts — which essentially vanished amid the 2008 market downturn.

By coming to market first, Goldman also would get an advantage when it comes to winning underwriting assignments from other mortgage lenders once the securitization environment improves.

A growing number of Wall Street banks and large asset managers have taken steps to set up mortgage conduits ahead of an anticipated reduction in the loan-buying limits of Fannie Mae and Freddie Mac on Oct. 1 — a shift that will lead to a big jump in the availability of jumbo-mortgage collateral. Goldman, which put its conduit plans in motion last year, already has assembled a pool of receivables that market players peg at more than $1 billion. The bank has been working with regional banks, credit unions, non-bank lenders and buyside players such as hedge funds to identify loans that meet its risk parameters, including borrower credit scores and loan-to-value ratios.

Market players said Goldman has had more success than others in finding suppliers of mortgage collateral because it is paying a premium for the loans. Jumbo credits typically trade at a few cents above par, but Goldman has been willing to bid several cents more than other buyers. “Goldman’s base rate for the loans is very good,” said a whole-loan buyer. It helps, he added, that Goldman has a deep balance sheet to fund the purchases.

The operation represents Goldman’s first stab at a jumbo-mortgage conduit. Prior to the credit crisis, the bank operated a conduit that bought and securitized subprime mortgages and home-equity loans.

The new conduit is the responsibility of a New York team led by Jeffrey Verschleiser. Before joining Goldman in 2008, Verschleiser was head of Bear Stearns’ mortgage-finance business.

Prior to the financial crisis, Fannie and Freddie guaranteed loans up to $625,000 — with anything above that amount classified as a jumbo mortgage. After the mortgage market collapsed, however, Congress raised the agency-lending limit to $729,750. Combined with sliding home values, that had the effect of reducing the supply of collateral available for private-label securitizations.

Come Oct. 1, Fannie and Freddie’s lending limit will almost certainly revert to its pre-crisis level. That means a wide swath of borrowers who would fit agency standards today will soon fall into the jumbo classification, creating opportunities for conduit operations to step in as financing sources.

The thinking is that soon after, the conduits will begin securitizing their credits — with the first deal hitting the market before yearend. However, the timing also will depend on issuers obtaining favorable funding costs and the stance regulators take on several key issues involving securitization — including how much exposure banks will have to retain to their deals.

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