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May 03, 2019  

Negative-Am Mortgage Bonds Resurfacing

Wells Fargo is auctioning off pre-credit-crisis mortgages in which the borrowers were able to defer early payments by adding to their principal balances — accounts that could land in securitization pools.

The bank started the effort by selling a few hundred million dollars of the so-called negative-amortization loans last year. Satisfied with the results of that offering, it sold $2 billion of the accounts this week as part of an auction that also encompassed $450 million each of nonperforming and reperforming mortgages.

While there’s no word yet on a specific bond deal, sources said the buyer of the negative-am loans, Credit Suisse, could pass on the accounts to Pimco — which apparently has shown an interest in using such receivables as securitization collateral. CarVal Investors, Ellington Management and FirstKey Mortgage also are considering similar offerings. Indications are those shops would bundle the receivables into transactions backed predominantly by reperforming home loans. Eventually, the offerings could contain entire tranches underpinned by negative-am loans.

Negative-am loans gained popularity in the years leading up to the 2007-2008 market crash, eventually accounting for roughly 15% of annual mortgage-securitization volume. The accounts often were structured as option adjustable-rate mortgages used for refinancing purposes. But like many other “affordability loans,” they tended to perform poorly during the crisis and haven’t been written or securitized in significant volumes since then. Most have been modified so that they no longer have negative-am formats, and thus are viewed as standard reperforming mortgages.

Wells’ loans are an exception. The bank largely left the terms of its accounts’ unchanged while working with borrowers to keep payments flowing. As such, the bank is seen as perhaps the only major source of ready-to-securitize negative-am mortgages remaining — with a portfolio of performing credits still estimated to total in the tens of billions of dollars.

Buyers, meanwhile, see the loans as more appealing today because the underlying properties’ values have risen sufficiently to protect them against borrower defaults. Wells’ accounts typically had high loan-to-value ratios at the start but since have seen their LTVs fall below 80% in many cases.

What’s more, many formerly struggling borrowers have seen their financial positions improve.

It’s unclear who bought the nonperforming-mortgage portion of this week’s loan sale. Goldman Sachs picked up the reperforming accounts.