When it comes to financing homes, more and more Americans may have Japanese investors to thank.
So say players in the $1 trillion mortgage-backed market, where high-yields and credit quality are turning heads overseas, especially in Japan.
Officials at U.S. agencies like the Federal National Mortgage Association, which has helped finance homes for more than six million Americans, say mortgage capital is increasingly coming from abroad as foreign bond buyers steadily increase their mortgage-backed holdings.
"We estimate some 15% of our mortgage securities -- about $15 billion -- ended up abroad" last year, said Larry H. Dale, senior vice president at Fannie Mae. "That seems to be growing this year."
Mr. Dale, speaking yesterday at a Fannie Mae investor conference in New York attended by more than 200 people from 20 countries, said, "the initial growth was principally in Japan. Japanese investors are a year or two ahead of Europe and the Pacific Rim."
Japanese institutions, which through the 1980s largely limited their investments in mortgage securities to U.S. bond funds or investment trusts at home, have stepped up their direct purchases of Fannie Maes and other agencie securities over the past year, market players say.
Mortgages have especially caught the eye of insurance and leasing companies, which must match their high-cost liabilities with high-yielding assets, as well as commercial banks, which hope to meet new international capital rules with low-risk mortgage holdings.
Now, international institutions are directly investing and diversifying into many types of mortgage products, including adjustable rate securities, 15-year fixed-rate pass-throughs, and derivatives. Also, the sector's strong performance -- mortgages led fixed-income investments in May with a 0.86% total return and have handed back 13.77% over the past 12 months, according to Salomon Brothers Inc. -- have encouraged investment committees to boost their mortgage allocations for 1991.
"There's still a lot of room to grow," Mr. Dale said. But considering the trading lags, currency risks, and cultural differences the market has already had to deal with, "it seems to us that's very substantial growth."
Will Japanese interest ever carry the same clout in mortgage securities it does in in the U.S. Treasury market?
Not likely, traders and analysts say. Foreign buyers account for a tiny fraction of the mortgage-backed market, which in the dollar-denominated arena is second only to the Treasury market in size, they note.
But interest is keen -- and growing.
While just 40% of senior Japanese bankers, traders, and investors who responded to a recent survey were in the mortgage market last year, nearly all of them hope to own and trade mortgages by 1995, according to the Secor Group, a subsidiary of Security Pacific Corp.
"The reasons behind that, I would offer, are basically they're a securitized instrument that [the Japanese] love because they're safe and riskless," said Richard A. Pregiato, managing director at Secor, which surveyed 600 professionals worldwide.
Also, "the underlying asset is real estate, which they love," he said.
Moving to woo foreign investors, Fannie Mae yesterday unveiled its first mortgage deal tied to the London interbank offered rate, the key funding rate for many international institutions. The agency signed commitments with RAC Mortgage Funding Corp. and Western Federal Savings to securitize six month Libor adjustable rate mortgages.
"The Libor ARM security is another step in Fannie Mae's effort to innovate and provide products that are attractive to overseas buyer," said James A. Johnson, Fannie Mae's chief executive officer.
Pegging mortgage securities to Libor makes them especially attractive to overseas banks, which do most of their funding in the Libor market, said Toshihiro Mori, a mortgage specialist for Goldman, Sachs & Co. in Tokyo. While fluctuations in the dollar may unnerve some international investors, "currency level is not important for dollar-to-dollar investors," which make up the bulk of foreign buyers of mortgage-backed securities.
Fannie Mae has been courting foreign buyers with technology, too. Earlier this year it unveiled a Japanese-language version of its Pool-Talk data system.
With such innovations, "there is potential for more growth in product lines or among investors that were not there two or three years ago," Goldman's Mr. Mori said, noting that leasing companies, for example, "did not know mortgage securities two years ago."
As for growth in foreign interest in 1991, "it somewhat depends on the overall fixed income market, [but] if [foreign buyers] like dollar-denominated assets, it will be high," probably between 10% to 20% he said.
Shackled to a leaden Treasury market, corporate bonds barely budged for the second straight day.
Most investment-grade and junk issues finished little changed in the secondary market, while just two corporate borrowers -- Texas Instruments Inc. and Great Western Bank -- tapped the recently popular 10-year area.
A First Boston Corp. team priced Great Western's $150 million of 10-year subordinated notes with a 9.875% coupon to yield 165 basis points over the Treasury curve.
Moody's Investors Service rates the issue Baa1; Standard & Poor's Corp. rates it A-minus.
Texas Instruments, meanwhile, inched out the curve with $150 million of 12-year notes priced as 9.25s to yield 96 basis points more than 10-year Treasuries.
The offering, priced by a Lehman Brothers team, is rated A2 by Moody's and A by Standard & Poor's.