Issuance of U.S. home-loan bonds without government backing has more than tripled this year to $7.4 billion, according to Deutsche Bank AG, as debt created before the housing slump rallies.
Notes sold in so-called non-agency securitizations of new loans, all of which were prime “jumbo” mortgages, reached $3.2 billion, Deutsche Bank analysts Ying Shen and Jason Wu wrote today in a report. Sales tied to older mortgages totaled $2.4 billion, while securities backed by non-performing debt were $1.8 billion. Issuance fell 13 percent last year to $2 billion.
While far from the $1.2 trillion issuance peak in each of 2005 and 2006, sales by Redwood Trust Inc. and Credit Suisse Group AG of new-loan bonds have lifted the total from less than $700 million last year as buyers seek higher returns after Treasury yields reached record lows. Firms including Carrington Mortgage Holdings LLC and Lone Star Funds’ Vericrest Financial Inc. have also tapped the market to finance investments in soured debt.
New issuance of all non-agency securities next year should be a “few billion over $20 billion” when including potential deals involving rental homes, the analysts wrote. “The rising new issuance should attract more investors to the non-agency market,” they said. “However, the supply of new paper should not dampen demand for higher-yielding legacy” securities that have rallied this year.
As defaults and refinancing outside of the market erases debt, the amount of outstanding non-agency bonds will probably shrink to about $860 billion by the end of next year, from about $1 trillion now, according to Deutsche Bank.
The collateral for existing debt ranges from riskier so-called subprime and Alt-A loans to bigger jumbo mortgages, those larger than allowed in government-supported programs. That’s currently as much as $729,750 for single-family properties in some areas, with limits ranging from $417,000 to $625,500 for Fannie Mae and Freddie Mac loans with the lowest costs for borrowers using 20 percent down payments.
Returns on non-agency securities average 19 percent this year, according to a report today by Amherst Securities Group LP. The debt continued to outperform assets such as high-yield company bonds and notes with lower default risk last month, beating most fixed-income categories by at least 0.5 percentage point, the broker said.
Bruce Richards, chief executive officer of Marathon Asset Management LP, which manages $10 billion of assets, said yesterday that he’s continuing to bet on subprime mortgages in “a very big way.”
Even after price increases that helped a Marathon fund whose investors include U.S. taxpayers gain 50 percent this year, a recovery in housing is “a wind to our back that will, I think, cause these securities to rise even further,” Richards said in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle.
Marathon’s so-called Public-Private Investment Fund, which three years ago received $475 million of equity and $949 million of financing from the Treasury Department as the U.S. sought to aid banks by boosting the value of mortgage securities, has ended its investment period, he said. Cumulative returns totaled 81.5 percent through Sept. 30, according to a Treasury report.