They're b-a-a-c-k! Mortgage bonds hitting the market

But questions already surfacing about risk -- and ratings -- of home-loan securities; AAA or AA?

May 25, 2013 @ 10:36 am

JPMorgan (JPM) Chase & Co. is planning its second sale of U.S. home-loan securities without government backing since the financial crisis the debt helped to trigger.

The bonds will be backed by $443 million of “high-quality” so-called jumbo mortgages, according to statements e-mailed today by Kroll Bond Rating Agency and DBRS Ltd., which expect to grant top grades to most of the notes. Jennifer Zuccarelli, a JPMorgan spokeswoman, declined to immediately comment.

The deal, like a $616.3 million transaction in March by the New York-based bank, contains relatively weak contractual promises that lenders or the issuer will repurchase loans that fail to match their promised quality, DBRS said. Sellers have begun taking different approaches to those terms as issuance in the so-called non-agency mortgage-bond market revives.

Still, “the representations and warranties framework in this transaction does show some improvements” from JPMorgan's last deal, including how fraud is defined, DBRS analysts including Claire J. Mezzanotte and Quincy Tang said in the statement.

DBRS and Kroll said that they took the weaker provisions into account in assigning grades to the securities.

Fitch Ratings, which will also rate most of the notes, said in a report that it was not asked to rank a $13.7 million slice of the offering. That tranche was granted AAA ratings by DBRS and Kroll. But Fitch said the risk of the debt means it deserves an AA grade, two levels lower.

Slow Acceleration

Issuance of non-agency bonds has been tied to about $6 billion of new loans this year, increasing from about $3.5 billion in all of 2012, according to data compiled by Bloomberg. Barclays Plc analysts said in a May 21 report that the expansion will be slow to accelerate and maintained a 2013 forecast of $12 billion to $15 billion. Sales peaked at about $1.2 trillion in each of 2005 and 2006.

The relative yields buyers demand on the bonds have been widening as issuance increases and amid investor concern that government-backed housing debt offered better value and that the mortgages will prepay slower than expected if interest rates rise or faster if they fall.

A May 17 offering by Redwood Trust Inc. (RWT) included $299 million of top-rated bonds that priced to yield 2.82 percent, or 1.90 percentage points more than benchmark swap rates. That compared with spreads of 1.75 percentage points on similar securities sold last month by the Mill Valley, California-based firm and as low as 0.97 percentage point in January.

Jumbo home loans are larger than allowed in government-supported programs, currently as much as $729,750 for single-family properties in high-cost areas. 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.

--Bloomberg News--

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Why some retirement plan advisers think Fidelity is invading their turf

InvestmentNews editor Frederick P. Gabriel Jr. and reporter Greg Iacurci talk about this week's cover story that looks at whether Fidelity Investments is stepping on the toes of retirement plan advisers.

Latest news & opinion

Is Fidelity competing with retirement plan advisers?

As the Boston-based mutual fund giant expands the products and services it brings to the retirement market, some financial advisers say the firm is encroaching on their turf.

Gun violence hits investment strategies, sparks political debates with advisers

Screening out weapons companies has limited downside.

Whistleblower said to collect $30 million in JPMorgan case

The bank did not properly disclose that it was steering asset-management customers into investments that would be profitable for JPMorgan Chase.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

If Finra eases firm oversight of outside business activities, broker-dealers could lose revenue

Brokerage firms would no longer be able to charge reps for supervising nonaffiliated RIAs.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print