Lone Star Sells Second RMBS Backed by Non-Prime Mortgages

Seven years after the housing bubble collapsed, Wall Street’s appetite for riskier mortgages is returning.

Billionaire John Grayken’s Lone Star Funds issued last week a small batch of residential mortgage-backed securities tied to borrowers with weak credit, the second known private offering of its kind to be sold since 2008.

The deal, called COLT 2015-1 and managed by Credit Suisse Group AG, yielded investors as much as 6.4 percent, according to data compiled by Bloomberg. The mortgages were originated by Caliber Home Loans Inc., a Lone Star unit, the data show.

It follows a similar offering completed by the firm in August, which was viewed at the time as a post-crisis milestone, signaling a re-opening of bond markets for non-prime mortgages. Since the U.S. housing crisis, Wall Street’s mortgage-securities issuance has been limited to bundling old, soured debt or big loans made to the wealthiest Americans. 

The only securities backed by new loans to delinquency-prone borrowers have been created by government-sponsored entities like Fannie Mae and Freddie Mac and are insured by taxpayers. Investment firms like Lone Star are betting they can generate returns by buying up mortgages made outside regulatory guidelines, which would encourage lenders to offer the loans to borrowers.

Barclays Plc expects less than $5 billion in bond offerings tied to mortgages made outside those guidelines to be sold next year, it said in a year-ahead outlook published Nov. 18.

Wall Street is trying to avoid the kinds of mistakes that contributed to the 2008 financial crisis. Lone Star, for example, retains a riskier portion of the new bonds as a gesture of faith that the securities will perform. The industry has also made efforts, mandated by various new laws, to improve underwriting practices.

At least two other RMBS deals are on the cusp of being sold. Nomura Holdings Inc. is underwriting separate transactions on behalf of Beach Point Capital Management and Angel Oak Capital, people familiar with the matter have previously said. These deals, now being marketed, have been months in the making.

Jed Repko, a Lone Star spokesman at J. Frank Associates, didn’t return telephone and e-mail messages seeking comment. Credit Suisse spokesman Drew Benson declined to comment, as did Angel Oak spokesman Freddy Martino at Gregory FCA. Nomura spokesman Jonathan Hodgkinson declined to comment.

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