JPMorgan Said to Seek First Sale of Mortgage Bonds Since CrisisJody Shenn
JPMorgan Chase & Co. is seeking to sell securities tied to new U.S. home loans without government backing in its first offering since the financial crisis that the debt helped trigger.
The deal may close this month, according to a person familiar with the discussions. Servicers of the underlying loans may include the New York-based lender, First Republic Bank and Johnson Bank, said the person, who asked not to be identified because terms aren’t set.
The market for so-called non-agency mortgage securities is reviving as the Federal Reserve’s $85 billion a month of bond purchases help push investors to seek potentially higher returns. As deals accelerate, Pacific Investment Management Co. is questioning the prices paid. At the same time, a weakening of contract clauses that offer protection to investors if the loans don’t match their promised quality is stoking debate, said Kroll Bond Rating Agency analyst Glenn Costello.
“There’s a pretty heavy dialogue going on right now between all participants in the market about what makes sense,” Costello, who is based in New York, said last week in a telephone interview.
Jennifer Zuccarelli, a JPMorgan spokeswoman, declined to comment on the bank’s potential transaction.
Redwood Trust Inc. and Credit Suisse Group AG, the only non-agency issuers since the market collapsed in 2008, have also been working on deals this month. Redwood created $1.1 billion of the debt in January, after issuance tied to new loans totaled $3.5 billion in 2012, according to data compiled by Bloomberg. That compares with less than $1 billion in all of 2010 and 2011.
The bonds have been backed by so-called prime jumbo loans, which are larger than allowed in government-supported programs. For Fannie Mae and Freddie Mac loans with the lowest costs for borrowers using 20 percent down payments, limits range from $417,000 to $625,500 in high-cost areas.
JPMorgan is telling investors its deal’s terms may allow some of the so-called representations and warranties about the mortgages from originators or itself to expire after 36 months to 60 months, the person said. Such contract clauses, which can be used to force loan repurchases, have led to billions of dollars of costs for banks on debt made during the housing boom.
After Credit Suisse included so-called sunsets of 36 months on certain buyback promises in a November deal, Standard & Poor’s, the only grader to rate the bonds, said in a statement that the move didn’t affect its view of the debt’s risks. The ratings firm cited the “exceptionally high credit quality” of the loans and that all of them had been reviewed by third-party firms before being packaged into the securities.
Rivals including Fitch Ratings, which publicly called S&P’s grades too high, are taking a more skeptical view. Changes such as sunset provisions and clauses that void loan-quality warranties if borrowers default after events such as job losses or illness generally should require greater so-called credit enhancement, said Rui Pereira, a managing director at Fitch.
Credit enhancement can include some bonds taking losses before others, cash reserves or payments from the underlying assets that exceed coupons on the securities created.
“Less investor-friendly provisions are something we need to take into account,” Pereira said last week in a telephone interview.
Issuers are seeking to move past a framework for representations and warranties provided by Redwood that represented a “gold standard,” Kathryn Kelbaugh, a senior analyst at Moody’s Investors Service, said last month during a panel discussion at a securitization conference in Las Vegas.
In Redwood’s latest deal, it may sell a top-rated class as large as $561.2 million with a 2.5 percent coupon at about 102 cents on the dollar, a person familiar with that offering said today, asking not to be named because terms aren’t set.
That compares with current prices of about 99 cents on the dollar for Fannie Mae-guaranteed 2.5 percent securities, according to Bloomberg data. Bonds issued in recent months by Redwood have been “insanely expensive” by comparison with Fannie Mae debt, Pimco’s Scott Simon said in an interview yesterday.
“I can’t believe someone would pay anywhere near where they have sold them,” said Simon, the mortgage-bond head at Newport Beach, California-based Pimco, manager of the world’s largest mutual fund.
The higher prices being discussed may signal bond buyers are gambling that the larger loans will remain outstanding for shorter periods if mortgage rates continue to rise, and also suggest that investors are looking past the potentially greater default risks of Redwood’s securities.
Wealthier homeowners may find it relatively easy to absorb the costs of moving amid higher borrowing costs, said David Land, a mortgage-bond manager at Advantus Capital Management Inc., who said he’s not investing in the deal because he sees too many of the loans as having risky features. By paying premiums more than face value, bondholders would also risk being damaged by homeowner refinancing if rates drop.