Banks Offer Mortgage Risk Exposure – And Investors Want It



More and more banks are selling high-rate financial products that open up America’s mortgages, auto loans, and corporate debt to investors.

The new bond product offers investors high yields, including in excess of 5 percent, but puts those same investors on the hook if the underlying loans diminish. report in Wall street journal

The newspaper reports that Texas Capital Bank sold $ 275 million of the securities at risk transfer earlier this year. At the same time, the regional bank added its name to the list of larger organizations that sell similar bonds, including Citigroup and JPMorgan Chase

“The addition of Texas Capital Bank to the list in March this year shows that there is potential for growth in this facility,” said Simon Boogie, an analyst at Structured Credit Investor. Journal

For banks, these products provide an opportunity to expand their balance sheets and ultimately provide more money. For investors, they offer higher yields than other bond products, but also an obligation to cover losses in the event that borrowers defaults on their loans.

If this practice sounds familiar, it is because it resembles some of the financial methods that became popular with investors in the mid-2000s, when the US housing market was heading for mass foreclosures.

Industry experts said the housing market stays healthier today than it was in the run-up to the subprime mortgage crisis. Today’s borrowers are not only more qualified to obtain debt, but their mortgages are also more likely to have fixed interest rates, providing more predictable monthly payments.

Meanwhile, the record high price increases appear to be driven by unique supply and demand factors which become more pronounced during a pandemic. These conditions may start to improve from the point of view of the buyer, but it is still far from normal.

These types of securities were originally created to protect Fannie Mae and Freddie Mac from some of the risks inherent in the mortgage market, the newspaper said. Now they are becoming more and more popular with institutional investors.

The yield on these new bond products could be greater than double that of US Treasury bonds and more traditional mortgage-backed securities, according to the report.

Their growing popularity also coincides with falling interest rates and declining yields from similar products.

“People want access to housing and consumer markets that work,” JPMorgan securities analyst Kaustub Samant told the newspaper. “Risk transfer securities are one of the few places that provide high returns in this environment.”

However, these products remain a very small part of the market, investors said. Journal… Time will tell if they stay that way.

Write to Daniel Houston


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