Banks are among the institutions taking advantage of a hot housing market by shedding mortgage risk with a new kind of bond.
The bond shares the risk of mortgage and loan default with institutional investors. The bonds are backed by short-term loans made from banks to mortgage lenders, according to the Wall Street Journal. When people borrowing from those lenders default, bond investors essentially cover the loss.
Banks are raising capital with the bonds — products designed to protect Fannie Mae and Freddie Mac from a market downturn — which in turn allows them to lend more. Major banks including JPMorganChase and Citigroup are increasing sales of risk-transfer securities that are tied to mortgages.
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Regional banks are getting in on the action too, with Texas Capital Bank selling $275 million of securities to investors as various parties try to take advantage of a mortgage-backed securities boom.
Investors are distinguishing the new bonds from products that helped trigger the financial crisis 13 years ago. Backers say they are a niche product made possible by the hot housing market, which saw home prices hit the biggest annual increase for the market in 20 years back in May.
Of course, housing was also hot in the mid 2000s, but turned out to be a bubble that burst in 2007 and 2008. The current run-up differs in that it is powered in part by a low number of home listings and is occurring despite tighter lending standards.
Still, the higher risk of the new bonds is reflected in their yields. Investors in the riskiest version can reap more than 5 percent interest. That trounces the 1.89 percent yield of 30-year treasury bonds and eclipses the 4 percent for corporate bonds.
As of July 22, the average yield for mortgage-backed securities was 1.36 percent, an ICE Bank of America index reported. That was down from nearly 2.4 percent in February 2020.
[WSJ] — Holden Walter-Warner