Banks are among the organizations taking advantage of the hot housing market by reducing mortgage risk with a new type of bond.
The bond shares mortgage and loan default risks with institutional investors. According to the Wall Street Journal, the bonds are backed by short-term loans provided by banks to mortgage lenders. When the people borrowing from these lenders defaults, bond investors essentially make up for the losses.
Banks raise capital through bonds – products designed to protect Fannie Mae and Freddie Mac from market downturns – which in turn allows them to lend more. Major banks, including JPMorganChase and Citigroup, are increasing sales of risk transfer securities linked to mortgages.
Regional banks are also taking part in this action: Texas Capital Bank is selling $ 275 million worth of securities to investors as various parties try to take advantage. mortgage-backed boom…
Investors distinguish new bonds from products that sparked the financial crisis 13 years ago. Proponents say it’s a niche product made possible by the hot housing market when house prices hit their biggest annual growth in 20 years in May.
Of course, the housing market was also hot in the mid-2000s, but it turned out to be a bubble that burst in 2007 and 2008. The current rise in prices is different in that it is partly caused by a small number of housing offers and occurs despite the fact that the tightening of lending standards.
However, the higher risk of new bonds is reflected in their yield. Investors in the riskiest version can get more than 5% profit. This drops the yield on 30-year Treasury bonds by 1.89% and dwarfs the 4% for corporate bonds.
According to the ICE Bank of America Index, as of July 22, the average yield on mortgage-backed securities was 1.36%. That’s down nearly 2.4 percent in February 2020.
[WSJ] – Holden Walter-Warner