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U.S. Mortgage-Bond Sale Surge Will Prove Fleeting, Fitch Says

A surge in sales of securities backed by new U.S. home loans will probably be short-lived, according to Fitch Ratings.

Redwood Trust Inc. sold bonds tied to $328 million of loans on March 28, while Credit Suisse Group AG closed a $742 million transaction on March 30 in which the bank partnered with Chimera Investment Corp., another real estate investment trust, according to data compiled by Bloomberg. Last week’s issuance almost doubled the total since the market seized in 2008 to $2.4 billion.

“It’s still going to continue to be a slow rebuilding process that’s going to take some time,” Rui Pereira, a managing director in New York at Fitch, said yesterday in a telephone interview. “My expectation is we’ll see another handful of transactions done this year.”

Expanded limits on the sizes of loans eligible for government-supported programs and “a strong bid” by banks for mortgages to hold on their balance sheets are curbing the supply available to securitize, Pereira said. Fitch isn’t seeing any additional deals that are “imminent or that I can comment on right now,” he said. The firm often starts studying transactions as much as six weeks before sales and has graded four of the six deals completed since the market froze.

Issuance of so-called non-agency home-loan bonds peaked at about $1.2 trillion in each of 2005 and 2006 before collapsing as foreclosures soared, home values plunged and prices for the debt tumbled, roiling global markets. The outstanding amount contracted to $1.09 trillion on Dec. 31, from $2.3 trillion in mid-2007, according to Federal Reserve data.

Demand for Redwood

Demand for the Redwood bonds sold last week was “strong” because “there’s a shortage of highly rated, high-quality assets,” said Adam Yarnold, managing director of securitized products trading at Barclays Plc’s securities arm, the underwriter. Buyers included banks, insurers and mutual funds. “Our investors want more assets like this, so we’re interested in bringing more deals,” he said.

Barclays has an agreement to provide Two Harbors Investment Corp. a credit line to accumulate new loans and then plans to underwrite a deal in which that REIT would retain the lowest-ranked portions, according to securities filings. Redwood and Chimera took those slices in the transactions last week, according to Fitch.

Jumbo Mortgages Predominate

All of the deals since 2010, when the market revived, have comprised so-called jumbo mortgages, or ones larger than government-supported programs allow. That’s currently as much as $729,750 for single-family properties in some areas. For Fannie Mae and Freddie Mac loans with the lowest costs for borrowers with 20 percent down payments, limits range from $417,000 in most places, to $625,500.

Government-backed lending accounted for 88 percent of new mortgages and home-equity loans last year, according to newsletter Inside Mortgage Finance. Other debt of more than $417,000 represented 8.7 percent of the total. That share rose to 9.3 percent in the fourth quarter as Fannie Mae and Freddie Mac loan limits fell, even with their minimums remaining elevated amid falling home prices under a law passed in 2008.

“The mortgage market can’t stay with 90 percent government originations and investors want high quality assets, so it’s natural” that the amount of non-agency deals is poised to increase, Yarnold at Barclays said.

Banks Restrain Supply

Banks so far have ample capital and capacity to hold onto more jumbo mortgages amid generally limited loan demand, restraining supply for bond issuers, said Michael McMahon, managing director of investor relations at Redwood, which completed the first five deals after the market revived. They also have plenty of cheap deposit funding, so selling off portions of the debt they hold as a financing tool isn’t attractive to them, he said.

“Banks have zero economic incentive to securitize,” he said in an e-mail.

Fitch, which said in a March 30 statement that the grades its rivals assigned to the Credit Suisse bonds were too high and that it wouldn’t rate the deal, still described the underlying loans as “high quality.” The company in a statement yesterday said only a single borrower of the approximately 1,800 whose loans were packaged into bonds since the start of 2010 is delinquent.

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