A revival of U.S. issuance of mortgage bonds not guaranteed by the government is being stymied by the Federal Reserve’s debate over when to reduce record stimulus, according to panelists at Information Management Network’s ABS East conference.
“As you got into the middle of May, just the talk of the possibility of considering tapering was enough to substantially change market conditions,” Peter Sack, a managing director at Credit Suisse Group AG, said today at the annual convention in Miami. “It wouldn’t be surprising to see very little if any” issuance for the rest of 2013, he said.
Sales are slumping as relative yields on the debt climb, making it more expensive for lenders sell the securities, Sack said. About $12.5 billion in deals tied to new loans have been sold this year, up from $3.5 billion in all of 2012, according to data compiled by Bloomberg. Sales have been building after freezing five years ago amid tumbling home values and soaring defaults.
Conservative projections at the end of the first quarter were for about $20 billion in new issuance this year, Sack said.
Mortgage originations to buy new homes and to refinance loans have slowed since Fed Chairman Ben S. Bernanke said on May 22 that the central bank may curtail $85 billion in monthly bond purchases as soon as September, said Patrick Tadie, an executive vice president at BNY Mellon, speaking on the same panel. The Fed kept its bond buying program unchanged at its September meeting.
“The rental market will continue to heat up,” Tadie said. “Homeownership will continue to decline, at least in the short-term.”
New issuers such as PennyMac Mortgage Investment Trust, the real-estate investment trust run by former Countrywide Financial Corp. executives, and mortgage-bond pioneer Lewis Ranieri’s Shellpoint are dominating the market, Tadie said. Banks are not likely to become active issuers in the near term, Sack said.
“It’s not economical when some of these entities that could be issuers are underinvested in terms of deposits,” Sack said. “It’s hard to say what the new normal of the market will be.”
The pool of bond buyers has shifted as well, said Steven Gaenzler of Five Bridges Advisors LLC. The mortgage market always had a “backstop buyer,” which ranged from Fannie Mae and Freddie Mac to real estate investment trusts, he said. The Fed is that buyer now, according to Gaenzler.
“One of the elephants in the room is who is the marginal buyer,” Gaenzler said during the panel. “We haven’t figured out who that buyer is going to be.”