10 years after a blowup in the private-label MBS market nearly brought down the global banking system, the biggest, most systemically important banks (who were ultimately forced to accept a government bailout and a round of consolidation during the fallout) have apparently decided that enough time has passed, and that now would be a good time to revive it, as they close deals on billions in newly issued mortgage-backed bonds, WSJ reports.
After many of their investors got stuck holding – as Jeremy Irons’ character in “Margin Call” so eloquently put it – “the biggest bucket of odorous excrement in the history of…capitalism,” the private label MBS virtually disappeared in the wake of the crisis. Over the years, smaller banks that weren’t burdened by all of the regulatory hangups of their SIFI peers have tried to revive the business, but to no avail.
But while private label MBS still only represents a tiny share of the overall market, issuance is picking up this year.
The timing is certainly interesting. Earlier this month, President Trump proposed privatizing Fannie Mae and Freddie Mac (it’s not too difficult to imagine some of these banks buying up chunks of the GSEs’ business). And even if the government can’t put together a plan to privatize the mortgage-origination giants, the White House will at least shrink them, creating more room in the market for private label.
With trillions of dollars of global bonds yielding less than zero, and the 10-year Treasury struggling to retake the 2% level, investors remain “starved” for yield. Since there’s no implicit government guarantee on private label bonds, investors will likely demand a higher yield than the MBS being packaged by Fannie and Freddie.
Still, there some obvious risks remain. While experts maintain that the banking system is in much better shape today than it was during the run-up to the crisis, many of the mortgages that will be used to package into these securities will be made by non-banks, which are more lightly regulated, and often thinly capitalized. Citigroup recently bought a pool of 932 mortgages from a nonbank lender called Impac Mortgage Holdings and used them to back more than $350 million in bonds in a deal that closed last month.
This risks a return to the pre-crisis days, when banks would bid on mortgages, incentivizing lenders to relax their standards to meet growing demand.
As we noted a few months back, JPM recently revived another relic from the pre-crisis days: The synthetic CDO. And it’s struggling to convince more clients to trade these products. The largest US bank by assets also recently did a private-label MBS deal recently with a bundle of mortgages that “didn’t qualify” to be bought by Fannie and Freddie. Goldman has done three deals since March and Wells Fargo introduced its first post-crisis offerings last October.
With home prices already at such unaffordable levels, and with millennials putting off decisions like buying a home, we’re curious: Where are these banks going to get all of these mortgages? Can they do it without seriously ‘relaxing’ lending standards?