Mortgage Bonds Show Foreclosure Crisis Overdone: Credit MarketsJody Shenn
The mortgage-bond market shows investors are shrugging off speculation the U.S. is in the throes of a foreclosure-document crisis.
Bonds tied to home loans on which borrowers often failed to document their incomes or on properties they didn’t plan to live in were up 1 cent at 64 cents on the dollar at the end of last week from a month earlier, according to Barclays Capital. The most-senior securities backed by so-called Alt-A mortgages with a few years of fixed rates have climbed 31 cents from a record low last March.
Federal officials including Treasury Secretary Timothy Geithner say delays in foreclosures, as attorneys general in 50 states investigate allegations of falsified documents, won’t lead to a moratorium on property seizures. Lenders eventually will be able to take back houses in almost all cases because homeowners have missed payments and the records aren’t that seriously flawed, according to TCW Group Inc.’s Bryan Whalen.
“Maybe it’s going to take a few extra months to shore up the paperwork, but let’s not take our eyes off the reality of the situation,” said Whalen, co-head of the mortgage-backed bond group at Los Angeles-based TCW, which oversees $115 billion in assets. “These aren’t people, by and large, who deserve to be in their homes.”
Prices are little changed across the $1.4 trillion market for so-called non-agency mortgage securities, which lack government backing and also include bonds tied to subprime loans, option adjustable-rate mortgages and jumbo debt, even after servicers including Ally Financial Inc. and Bank of America Corp. halted foreclosures or evictions.
Expectations that delays in foreclosures will be limited are helping to support prices for the securities, TCW’s Whalen said. About 26 percent of the loans underlying the securities are at least 60 days late, in foreclosure proceedings or already backed by seized properties, according to data compiled by Bloomberg.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt was unchanged at 168 basis points, or 1.68 percentage points, down 13 basis points since Aug. 31, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.41 percent, down from 3.43 percent at the end of last week.
PepsiCo Inc., the world’s largest snack-food maker, may sell debt in a three-part benchmark offering, according to a person familiar with the transaction. The sale may include 3-, 10- and 30-year bonds and occur as soon as today, said the person, who declined to be identified because terms aren’t set. Benchmark sales are typically at least $500 million.
Markit CDX Index
An indicator of corporate credit risk in the U.S. climbed for the fourth time in six days. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.81 basis point to a mid-price of 97.67 basis points as of 12 p.m. in New York, according to index administrator Markit Group Ltd.
The index, which typically rises as investor confidence deteriorates and falls as it improves, touched the lowest in more than five months Oct. 13 at 95.5 basis points. In London, the Markit iTraxx Europe Index of 125 companies with investment- grade ratings fell 1.16 to 101.21.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point, 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.
Losses for mortgage-bond holders typically increase from when homeowners stop making monthly payments to when the debt is liquidated, such as through sales of seized properties.
The longer the process takes, the higher the bill for property taxes, insurance and maintenance. Extended timelines also increase the amount that loan servicers advance to cover borrowers’ missed principal and interest payments, benefiting junior-ranked securities that might otherwise go unpaid and later hurting investors in senior bonds.
Estimates for the harm to the value of senior bonds include a reduction of 1 cent on the dollar for an Alt-A bond for three months of delays to foreclosures, according to Whalen. In an Oct. 15 report, JPMorgan analysts estimated a drop of 4 cents for a note with a six-month extension.
Bondholders were already bracing for longer timelines as foreclosures overwhelmed servicers and the government pushed for borrowers to get reworked debt, according to Seer Capital Management LP Chief Executive Officer Philip Weingord, whose hedge-fund firm oversees about $300 million.
“So I’m not going to assume it takes three years but instead three years and four months? It’s not going to change things much,” Weingord, the former head of global markets in the Americas for Deutsche Bank AG, said in a Sept. 30 interview in New York.
Dealer auctions of non-agency mortgage securities on behalf of investors reached about $6 billion during each of the past two weeks, double the pace from the preceding few weeks, Bank of America analysts wrote in an Oct. 17 report.
As investors sought to sell, senior securities backed by option ARMs, whose minimum payments result in growing loan balances, were unchanged over the past month at 59 cents on the dollar, compared with a record low of 33 cents in March 2009. Bonds backed by fixed-rate jumbo mortgages, or larger than government-supported Fannie Mae and Freddie Mac can finance, were unchanged at 89 cents, up from 63 cents in March 2009.
Geithner said in an Oct. 12 interview on “Charlie Rose” that the Obama administration wasn’t prepared to call for a nationwide moratorium on foreclosures because it would be “very damaging” to U.S. homeowners and the real-estate market.
The Association of Mortgage Investors, a Washington-based trade group, on Oct. 1 said home-loan securities trustees should try to ensure that loan servicers, not bondholders, bear the damage of the servicers’ inappropriate policies. Ally and JPMorgan said their employees may have completed affidavits without confirming their accuracy.
Because “bond prospectuses list an extended foreclosure if some of the documents are missing as a potential risk,” investors may not be able to force loans to be repurchased by lenders or bond creators “if the trust can eventually foreclose,” Barclays Capital analysts said in an Oct. 15 report.
In the “less likely” situation where foreclosure can’t be completed because of missing documents, investors may be able to force repurchases, even though in some cases the responsible lenders may be out of business, particularly with subprime debt, analysts Sandeep Bordia, Jasraj Vaidya and Sandipan Deb wrote.
Bondholders aren’t worried about the validity of the Mortgage Electronic Registration System, or MERS, which is used to track the ownership of home loans, because it’s withstood court challenges, TCW’s Whalen said.
It’s unlikely a large number of mortgage notes are completely missing and nonsense to worry that loans weren’t properly transferred to mortgage-bond trusts because of blank endorsements, potentially invalidating tax benefits, said Tom Deutsch, executive director of the American Securitization Forum, a New York-based trade group.
“My sense is it’s more anecdotal than systemic,” he said.
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