BofA Gets $6 Billion Bond Boost From Fannie and Freddie

Bank of America Corp. is turning to Fannie Mae and Freddie Mac to guarantee more than $6 billion of older mortgages in what debt analysts say is probably a strategy to help it comply with tougher banking regulations.

The lender pooled the loans, which were granted to borrowers from 2010 to 2013, into new securities insured by the companies in the past two months. The issuance fueled a jump in bonds tied to older, or “seasoned,” loans. That also included $2 billion granted by SunTrust Banks Inc. from 2009 through 2011, according to Citigroup Inc. and Credit Suisse Group AG.

Creation of such bonds in September is more than twice the previous monthly high in the year through July. The most likely explanation: after originally retaining the high-quality mortgages as investments, the banks are transforming them into government-backed securities to meet capital or liquidity rules, Citigroup said. That could come from selling and using the cash to buy assets deemed safer, or just by holding onto the debt, based on its own favorable regulatory treatment.

“It makes perfect sense to do that,” said William Weber, a former bank treasurer who’s a senior strategist at Brean Capital LLC. “If you securitize it and you don’t sell it, basically what you’ve done is help your capital ratios and create a liquid asset.”

Dan Frahm, a spokesman for Charlotte, North Carolina-based Bank of America, and Hugh Suhr of Atlanta-based SunTrust declined to comment, as did Keosha Burns of Fannie Mae and Tom Fitzgerald of Freddie Mac.

Earning More

A bank might earn more on mortgages without turning them into securities because Fannie Mae and Freddie Mac charge annual insurance fees of about 0.5 percent, meaning the guarantors seized by the U.S. in 2008 could also see more revenue.

Another reason for the banks to securitize loans would be to more quickly profit from the debt after bonds rallied, Credit Suisse analysts led by Mahesh Swaminathan wrote today in a report. Guaranteed securities are easier to sell than loans.

“Given banks’ continued quest for assets, we think that only a portion of the recent seasoned issuance will be sold,” they said.

The market didn’t see any widely distributed requests for bids on the Bank of America pools, differing from the SunTrust issuance, suggesting it probably kept the bonds, Deutsche Bank AG analyst Steve Abrahams said in a telephone interview.

A surge in seasoned-mortgage securitization has potential implications beyond the banks, according to analysts from Citigroup and Morgan Stanley to Deutsche Bank and Credit Suisse Group.

Limited Supply

Limited supply has helped the $5.4 trillion market for government-backed mortgage securities withstand the Federal Reserve’s reduction of its bond purchases this year, contributing to lower interest rates on new mortgages. The creation of additional bonds comes with the Fed poised to end its new asset purchases, probably next month.

“If they are sold, the supply would need to be absorbed by other market participants,” the Citigroup analysts led by Ankur Mehta wrote in a Sept. 12 report.

The securitizations also may signal banks will retain fewer of their new loans that could be packaged into Fannie Mae and Freddie Mac securities, they said, reversing this year’s increase.

Commercial banks boosted holdings of closed-end home loans to $1.59 trillion as of Sept. 3, from $1.56 trillion on Jan. 1, even as they disposed of more soured mortgages, Fed data show. They own about $1.3 trillion of agency, or government-backed, mortgage securities.

Mortgage Holdings

Bank of America held $237 billion of residential mortgages as of June 30 and about $230 billion of agency mortgage bonds, according to a disclosure on the website of the lender, which has $2.2 trillion of assets.

Under risk-based calculations of asset sizes used in determining the amount of capital U.S. banks need, most mortgages count at 50 percent, compared with 20 percent for Fannie Mae and Freddie Mac securities and zero percent for bonds backed by U.S.-owned Ginnie Mae.

While Bank of America now has enough capital, its so-called common equity tier 1 ratio would fall to the minimum of 8.2 percent at mid-2016 in a severe economic downturn, the lender said in a Sept. 15 disclosure. Regulators began using such stress tests after the 2008 crisis to help determine whether lenders can take actions such as paying dividends.

New Rules

Under separate rules adopted this month and meant to ensure that banks have enough easy-to-sell assets to survive a crisis, Ginnie Mae securities count fully and Fannie Mae and Freddie Mac bonds qualify partially.

Bank of America, the parent company, is already exceeding the 2017 requirement for liquidity, while it’s “well positioned” at its bank units to meet the tests “in advance of implementation timeframes,” according to slides from a Sept. 10 presentation posted on its website.

While buying old mortgages may not seem in line with Fannie Mae and Freddie Mac’s mission of fueling new lending, it can help encourage banks to retain loans and then to find new ones, according to Lawrence White, a professor at New York University’s Leonard N. Stern School of Business.

“Providing liquidity today, tomorrow, or five years from now is all part of the mission,” said White, co-author of “Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance,” a 2011 book on their pre-crisis business.

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