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October 05, 2018  

BofA Sale Points to Shift in MBS Sentiment

The sale of a mortgage-bond portfolio by Bank of America could point to an increased willingness by large banks to issue new deals in the sector.

The thinking is that the offering, encompassing $1.8 billion of securities from issuers including Countrywide, Deutsche Bank and Lehman Brothers, signals that BofA wants to lessen its mortgage exposure. Another way to accomplish that would be through securitizations of whole loans.

“It could be part of a larger trend of banks not wanting to hold mortgages anymore,” one source said, pointing to recent efforts by Goldman Sachs to re-establish itself as an underwriter and issuer of home-loan paper. A similar issuing push is developing at Wells Fargo.

Rising interest rates could be the catalyst, as the cost of on-balance-sheet funding for mortgages has increased to the point where securitization makes more sense. Rising rates also could slow the housing market, thus making mortgage exposures less attractive. “Maybe now is the time to sell, and you are timing it more against the housing market than the [mortgage-bond] market,” another source said.

Only a few major investment banks currently issue bonds backed by newly originated mortgages, including Credit Suisse and J.P. Morgan. But many hold large loan portfolios that would be suitable for securitization, or could build up such holdings in short order.

For its part, BofA hasn’t sold bonds backed by new home loans since 2011.

BofA’s secondary-market package was made up of securities issued before the 2007-2008 market downturn — some of which it inherited with its credit-crisis takeover of Countrywide. The bank put the securities out for bid on Sept. 21, with offers due Sept. 26. It finalized the sale Sept. 30.

Investors have long been eyeing BofA’s portfolio, which they see as one of the last major concentrations of ready-to-sell mortgage bonds from the pre-crisis era.

One trader said BofA previously didn’t respond to inquiries from prospective buyers. This time, he said, an unsolicited bid made the bank realize how much it could get for the holdings — which went to numerous dealers that passed them on to large investors including Bayview Asset Management, Lone Star Funds, Pimco and Varde Partners.

Because the portfolio mainly encompassed senior subprime-mortgage securities, which have been selling for more than 85 cents on the dollar, it drew less attention from smaller hedge fund managers that recently have been seeking bargains on the secondary market. But the sale did include some bonds backed by home-equity lines that went for about 50 cents.

Even with those discounts, the average secondary-market values of mortgage bonds remained unchanged last week. “There was a lot of demand, but many people wanted to buy the paper a little cheaper,” the trader said. “Those who wanted to buy cheaper found they couldn’t buy anything.”

At the same time, the activity helped create a flurry of trades that brought the volume of mortgage bonds offered on the secondary market last week to $4.3 billion — the highest level of the year, according to Empirasign. The next busiest week was Sept. 10-14, at $2.1 billion. The weekly average for 2018 stands at $1.2 billion.

Along with economic considerations, BofA’s willingness to liquidate its positions may have reflected the finalization of so-called putback claims in which the issuers bought back collateral loans that violated representations and warranties. In any case, the bank appeared eager to complete the transaction by the end of the third quarter.

An abbreviated review process resulted, drawing some grumbles from industry participants. That’s because the offering coincided with Information Management Network’s “ABS East” conference in Miami Beach, causing some participants to skip the event or cut their trips short, another source said.

Yet another market professional suggested that other banks may hesitate to sell bond portfolios because the holdings are generating strong returns at a time when spreads have been tightening.