Managing directors in mortgage-backed securities operations continue to fall by the wayside as top firms close or significantly reduce their participation in the market, amid heavy refinancing of loans by consumers.
The latest was Kevin Finnerty, managing director in charge of mortgage operations at the Union Bank of Switzerland, who resigned last week. His resignation followed the previous week's departure of Ranjit Kripalani, who was managing director of Chase Manhattan Corp.'s mortgage-backed operation.
How far will the cuts go? While some firms are downsizing, others are redoubling their efforts to keep their mortgage-backed securities operations focused on market niches that meet the demands of investors.
There may be a reshuffling of the top-ranking mortgage-backed security managers as a result of some players dropping out, but other firms continue to see good earnings potential in mortgage-backed securities for 1998.
Proceeds from mortgage-backed securities total nearly $9.7 billion from the 28 issues so far this year, according to Securities Data Co. In 1997 proceeds were $197.3 billion, from 651 issues.
J.P. Morgan, ranked 16th, with a 0.5% market share, by Securities Data, has no plans for cutbacks.
"We've actually been building up our mortgage-backed business over the past year or so," said Mark B. Werner, managing director in charge of fixed income trading at J.P. Morgan.
"We frankly feel and have felt for some time that given the size of the mortgage-backed market, there is quite a bit of demand by our client base for access to that market," Mr. Werner said. J.P. Morgan has increased its presence in collateral trading and has continued to build and develop its asset-backed and commercial mortgage-backed business, he added.
"I think investors today are slightly more familiar with the risks inherent in the mortgage market," Mr. Werner said. "It's probably why there has been such good performance in the market over the last year or so."Investors in mortgage products purchase options to provide insurance or protection against prepayment risk, Mr. Werner said. The additional cost of this hedging strategy reduces the spread on the security but creates a comfort zone for investors.
With two traders per position and volume up, Salomon Smith Barney intends to maintain its position as the market leader in mortgage-backed securities, said Mark I. Tsesarsky, managing director and co-head of the mortgage department. Salomon Smith Barney is even selectively looking to hire more talent, he added.
"Our plan is to continue our dominant presence in the marketplace. We're trying to expand in certain areas of our department," Mr. Tsesarsky said.
"It's hard to generate volume for some people that are starting in the business right now," he added.
The impact from the megamerger of Solomon Bros. with Travelers Corp., which resulted in Salomon Smith Barney, may help generate more business for the investment house, but such mergers also may be scaring smaller operations out of the business.
"We're trying to figure out how we can capitalize on this wonderful platform that Smith Barney brings to the table," Mr. Tsesarsky said.
"We're actually seeing investor classes returning to the marketplace that have been absent when the market was more stable and mortgages were much more expensive," Mr. Tsesarsky said. With prepayment fears and uncertainty in the direction of interest rates, opportunities are available for people with market savvy, he added.
Five months into the fiscal year, Salomon Smith Barney is optimistic about mortgage-backed securities.
"I think that this market presents more opportunities than it has before for well-established players," Mr. Tsesarsky said.
