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Investors Doubt Mortgage-Bond Revival Until 2012, Moody's Analysts Say
Investors doubt the market for home- loan securities without government backing will revive until 2012, according to Moody’s Investors Service.
About 74 percent of attendees surveyed for a June conference by the New York-based rating company responded that issuance, which essentially halted in 2007, will make a substantial “comeback” no sooner than 2012, Moody’s analysts Navneet Agarwal and Brian Harris wrote in an Aug. 6 report. Panelists speaking at the event agreed with the findings, they said.
The Moody’s conference wasn’t held last year with the market frozen, Agarwal said yesterday in a telephone interview. Issuance peaked at almost $1.2 trillion in both 2005 and 2006. A limited revival was derailed in June, when potential issuers had to adjust to new regulations requiring them to provide loan data and communications to all rating firms, and then later rule changes, Linda Stesney, a Moody’s managing director, said.
“The pipeline is just kind of starting to wake up again,” Stesney said in an interview, referring to potential sales of securities backed by both new and older mortgages.
In April, Redwood Trust Inc. and Citigroup Inc. partnered to create the first new-mortgage securities without government- backed guarantees in more than two years, securitizing $237.8 million of so-called jumbo mortgages, after slumping home prices and soaring defaults wiped out investors in some AAA rated slices of mortgage debt.
Aiding Revival
Market participants believe that eventual reductions in the loan limits for government-supported Fannie Mae and Freddie Mac, which were boosted in 2008 to as much as $729,750 in some areas to support housing, will contribute to a revival in the so- called non-agency mortgage bond market, Moody’s said.
The market is also likely to revive because securitization, including through sales of debt and the slicing of loans into tranches with different payment profiles, allows financial companies to manage interest-rate risk, Agarwal said. The government will want to maintain 30-year fixed-rate mortgages as the dominant U.S. loan product, he said.
At the same time, so-called covered bonds are either “not a viable alternative” to mortgage securities or “not comparable” to them, 80 percent of conference attendees told Moody’s, according to its report. The covered-bond market is similar to the financing already available to lenders from the Federal Home Loan Bank system, which is “very efficient,” Moody’s said.
Prospects for covered bonds, which are backed by guarantees from lenders as well as loans that remain on banks’ balance sheets, may be boosted by legislation that last month passed a U.S. House of Representatives panel, Moody’s analyst Yehudah Forster wrote in another section of the Aug. 6 report.
The bill doesn’t address the risk that the underlying loans’ market values may not be sufficient to repay investors if an issuer defaults, and may lead to “inconsistency” in regulation across different types of issuers, Forster said.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net
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