The packaging of new home loans into securities lacking government guarantees, a practice halted two years ago, may get a bit of a revival this year, industry executives said.
"You're going to see people come to market to some extent, but it's just going to be 'dipping the toe in the water' this year," Bill Felts, a senior vice president at Citigroup Inc.'s mortgage unit, said at the American Securitization Forum conference in Washington. "I'm hearing more talk about it. Last year at this time, I wasn't hearing anything."
A potential revival involving securities backed by jumbo mortgages is a "wild card" for securitization markets even with further healing likely for sectors including commercial-mortgage bonds that were resurrected last year after freezing for shorter periods, said Valerie Kay, a managing director at Morgan Stanley.
The "math" related to new jumbo interest rates and to the yields that bond investors might seek suggests a less than 1-percentage-point difference now makes home-loan securitization unprofitable, Kay estimated. That involves guesswork about how much of the debt can get certain grades from rating firms, she said.
Limited issuance may not mean much for homeowners and property buyers, as one issue that will prevent any sizable amount is that Fannie Mae, Freddie Mac and the Federal Housing Administration can now finance mortgages as big as $729,500 and property prices have tumbled, said Sean Dobson, chief executive officer of the brokerage Amherst Securities Group LP, and Jordan Schwartz, a lawyer at Cadwalader, Wickersham & Taft LLP.
That means more of the largest loans are eligible to be purchased or guaranteed by Fannie, Freddie or the FHA. Sales of bonds backed by their loans now finance almost all new home lending. Jumbo debt exceeds Fannie and Freddie limits, which are $417,000 in most areas.
An additional hurdle to securitization is that banks are for now interested in holding more jumbo mortgages, partly because of their limited opportunities to add loans with the economy weak and standards high, said Nancy Mueller Handal, managing director for structured finance at MetLife Inc., and Glenn Schultz, a mortgage bond analyst at Wells Fargo & Co.
Nonagency issuance totaled about $44 billion last year, up from $25 billion in 2008, reflecting resecuritizations of outstanding securities as well as about $800 million of debt backed by older loans, according to the newsletter Asset-Backed Alert.
Policymakers shouldn't count on much interest in the debt in the near future as they consider ways to scale back the government's role in housing, said Garry Cipponeri, a senior vice president at JPMorgan Chase & Co.'s mortgage unit.
"It's not coming back anytime soon in my opinion," he said.