Banks Back In Mortgage Bundling Business, Instruments Tanked Economy In 2008

The Great Recession turned banks sour on bundling mortgages and selling them as securities. Today banks see an opportunity to make money by supporting the U.S. mortgage system.

The change in attitude comes as non-bank entities have become the major players in the mortgage industry and as the Trump administration moves to ease government control of Fannie Mae and Freddie Mac. A survey by the Mortgage Bankers Association indicates might be looking to increase their portfolios by as much as $120 billion.

The 2008 economic collapse was triggered in part by bundling since many of the packaged mortgages relied on subprime instruments plagued by a high default rate. The new breed of securities is comprised mainly of adjustable rate mortgages and loans granted on the basis of alternative income documentation instead of full tax returns.

“It is a much healthier market than in the past,” said Paul Norris, head of structured products at Conning, a global investment firm with $145.5 billion of assets under management, in an interview with MarketWatch.

Banks never really got out of mortgage securities but greatly reduced their involvement. What is different about this round, the Wall Street Journal reported Monday, is that banks are buying loans from third parties and then underwriting the securities, including mortgages that are eligible for sale to Fannie Mae and Freddie Mac as well as those considered riskier. What’s missing are the complex derivatives that overlaid the earlier deals.

JPMorgan (JPM) restarted its program several years ago but recently expanded it. Wells Fargo (WFC) jumped back in in October while Goldman Sachs (GS) stayed clear until March. Citigroup (C) bought 932 mortgages worth more than $350 million from Impac Mortgage Holdings in a deal that closed last month.

“We continue to be excited about, and focused on, developments within the ‘next generation’ non-agency mortgage markets, Greg Parsons, chief executive officer of Semper Capital Management, a $3 billion fund that focuses on mortgage bonds, told MarketWatch, noting Citigroup and Credit Suisse remained involved in the area all along. Bank of America expects the market to keep growing and ratings agencies are giving these securities positive reviews.

The Urban Institute calculated $70 billion ended up in private-label mortgage bonds last year.

The Mortgage Bankers Association reported last week mortgage credit availability fell 3.9 percent in August, indicating lending standards are tightening, the biggest decrease since 2018. MBA Associate Vice President of Economic and Industry Forecasting said it’s possible some lenders are tightening credit because they see a slowdown coming.