Two Harbors Is Latest Mortgage REIT to Close Bond-Making Unit

Two Harbors Investment Corp. said it’s closing a unit that bundles home loans into bonds to sell to investors, in the latest sign of the bruising competition among investors and banks for safe mortgage assets.

Citing "the challenging market environment," the real estate investment trust said it expects to have closed most of the business by the end of this year. The unit packaged high-quality mortgages that are too big to be guaranteed by the government, known as jumbo loans, into bonds.

Since the housing bubble burst, these bonds have been one of the few types of mortgage securities that investors have bought from issuers without government guarantees. The borrowers for jumbo loans tend to be wealthy and to have strong credit histories, making the bonds backed by these mortgages relatively safe. 

But banks flush with deposits have been willing to pay more for these loans than bond investors, making it more profitable for lenders to sell mortgages to banks than to securitize.

"Current and expected mortgage market conditions and competitive pressures will prevent us from growing this business to a scale that meets our long-term goals and financial expectations," Thomas Siering, chief executive officer at Two Harbors, said in a statement.

Joining Others

Other lenders that packaged jumbo mortgages into bonds have also stepped back from that business. Last week, Five Oaks Investment Corp., another real estate investment trust, said it was scaling back its unit. WinWater Home Mortgage, a unit of hedge fund Premium Point Investments, shuttered its program earlier this year, citing similar challenges.

"The only avenues for jumbo mortgage financing will be through large money-center banks," said Jason Callan, head of structured products at Columbia Threadneedle Investments, which oversees about $500 billion in assets. That means less competition and fewer choices for borrowers, he said. 

Shrinking Jumbo

Investors have largely shunned mortgage bonds that don’t have government guarantees, after getting burned with securities backed by subprime home loans as the housing bubble burst. Issuers sold about $60 billion of non-government residential mortgage bonds last year, compared with more than $1.24 trillion in 2006, according to data from the Securities Industry and Financial Markets Association. Of that $60 billion, just $12 billion were traditional non-government mortgage securities.

JPMorgan Chase & Co. analysts had forecast in November that $10 billion of prime jumbo loan mortgage bonds would be sold this year. Less than $2 billion of the securities have been sold through June, according to its data. That’s one of the weakest years for issuance since the crisis. 

Two Harbors, managed by a unit of hedge fund Pine River Capital Management, said it would take a $3 million charge in the second half of 2016 after closing the unit, and that shutting the business will reduce annual expenses by $10 million to $11 million a year. The company sold mortgage bonds under the name "Agate Bay Mortgage Trust." Two Harbors posts earnings next week.

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