Wall Street Watch: Market Seen Heating Up For Mortgage Securities

Wall Street is high on mortgage-backed securities, according to a new survey that took the pulse of bond dealers and traders.

The next year will bring increased demand and a surge of trading, according to most fixed-income executives contacted by the Public Securities Association.

Foreign investors, looking for greater yields, will help propel the market, said respondents to the survey by the New York-based trade group, whose members are investment banks and securities firms that deal in bonds.

The projection will be bolstered if foreign economies remain weak, allowing U.S. interest rates to remain competitive, bond executives said.

"The mortgage securities business has been more robust during the first quarter of this year than it's been in the past year and a half," said Thomas K. Guba, chairman of the PSA's mortgage securities division.

Mr. Guba, a managing director at Donaldson, Lufkin & Jenrette Securities, said lower interest rates were a factor in the influx of business. These rates "provide more healthy and robust activity in the bond market," he said. Market conditions are also such that "dealers are able to craft securities that are attractive to a broader range of investors," he said.

While the survey generally struck an upbeat tone, it found some pessimism, too. One trader, who was not named, said long-term portfolio managers had been acting "gun-shy" about buying mortgage securities. Another executive commented: "We will continue to face a shrinking customer base because there has been some poor pricing and a lot of bad publicity."

Increased competition - from Fannie Mae and Freddie Mac, as well as from automated systems like those operated by the Bloomberg and Reuters wire services - was also cited by some traders.

But the vast majority of bond executives are upbeat, according to the survey, which was conducted late last month and got responses from 70 bond professionals. Based on the anticipated increase in activity, half the executives involved in mortgage-backed securities said they believe the industry will increase its profits in the coming year.

The bond executives also said improved technology would help expedite trading and settling.

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Ever wonder what happens to mortgage securities once they're packaged and sold? Many investors, such as life insurance companies and pension funds, prefer to hold the products indefinitely.

Others buy up a bunch, then try to deploy them strategically to improve operations. Dime Bancorp did just that during the first quarter by selling a chunk of its portfolio.

The New York thrift used $1.1 billion of its $7.8 billion of holdings to downsize its balance sheet and pay off borrowings.

Dime presented to Wall Street a pool of securities that was floundering because of quicker-than-expected prepayments, said Franklin Wright, the thrift's director of external affairs. Because the assets were underperforming, Dime took a $23 million loss on the sale.

But the move was worth it, said Mr. Wright. It freed up space on the thrift's balance sheet for the whole loans that Dime is now booking in greater quantity, he said.

The thrift has another $2.6 billion of mortgage securities it could still offer for sale, he added.

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