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

Mortgage-backed bonds are hitting the market once again. But questions are already being asked about the risks -- and ratings -- of the home-loan securities.

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–