New appetite for mortgage bonds that beat Fannie and Freddie

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Wall Street is once again diving into the business of converting home loans into bonds, creating new competition in a market long dominated by state-backed mortgage giants Fannie Mae and Freddie Mac.

The so-called private label mortgage market, in which financial firms act as intermediaries, creating gigantic pools of loans and selling them to investors, more than $ 42 billion were issued in the second quarter. This is the highest since the start of the pandemic and nearly the highest in a quarter since the last financial crisis, according to industry research firm Inside Mortgage Finance.

This market still represented only 4% of all mortgage bonds issued in the last quarter. Fannie Mae and Freddie Mac, which issue federal guaranteed bonds to investors, remain the dominant players in the industry.

But mortgage investors expect the private market to continue to grow as a repository for loans that Fannie and Freddie are unable or unwilling to buy, such as those related to investment properties, ultra-expensive homes, or self-employed borrowers. Recent issuers include Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co., as well as a growing number of banks and real estate firms.

As it has become more liquid in recent months, the private label market has sparked interest from more money managers looking for profitability in an era of low rates. Private label securities generally offer higher yields than those issued by Fannie and Freddie because they have no government guarantee that investors will receive money.

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