adios
07-15-2004, 12:04 PM
Attractive bond yields like this perk my interest. First of all similarly rated corporate bonds have much lower yields than this new breed of MBS. Second of all in a strong economy where credit risk may be declining and short term interest rates rising (these things pay over and above short term LIBOR rates) these would seem ideal to me. MBS market is bigger than the treasury market btw. Here's the article:
Bank of America's Mortgage Twist
Lender's Structured Bonds
Reduce Exposure to Risk
Of Defaulting Homeowners
By CHRISTINE RICHARD
DOW JONES NEWSWIRES
July 15, 2004; Page C6
NEW YORK -- Mortgages are big business at Bank of America Corp., but the bank's exposure to mortgage risks isn't as big as some may think.
In a series of credit-market transactions, one rated within the past few weeks, the Charlotte, N.C.-based banking behemoth has reduced its credit exposure on at least $70 billion in conforming and jumbo mortgages.
Through the sale of structured bonds called real-estate synthetic investment securities, Bank of America has passed along to investors the risk of hundreds of millions of dollars of potential credit losses on a portfolio of billions of dollars of mortgages.
"It's a way of shifting exposure off their books," said Michael Gerity, senior director at Fitch Ratings in New York, which has rated several of the transactions.
These structured bonds, which carry ratings from midinvestment grade to midspeculative grade and are issued by RESI Finance Limited Partnership, are a new twist on mortgage-backed securities. While mortgage-backed securities pass along the payments homeowners make on their mortgages to investors, these synthetic securities pass along losses on a portfolio of mortgages.
In other words, when a homeowner defaults on a mortgage and the sale of the home results in a loss, that loss is borne by the securities holders, starting with those furthest down the ratings scale.
The most recently rated RESI deal included $164 million in securities, broken into eight portions with ratings ranging from single-A-2 to single-B-3 by Moody's Investors Service. The deal was based on a portfolio of $14 billion in jumbo mortgages purchased from various originators.
Brian Vonderhorst, an analyst at Standard & Poor's Ratings Group, said the structure used in the RESI transactions has been employed almost exclusively by Bank of America, though other financial institutions have shown interest in it.
While mortgages have performed well in recent years, analysts are becoming increasingly concerned how consumers will shoulder debt payments in a rising-rate environment. There is also concern that home prices, which have been boosted by falling interest rates, could decline as mortgage rates rise.
In supplementary financial data published yesterday with its second-quarter results, Bank of America reported its average balance of residential mortgages had increased to $157 billion for the first half of 2004 against an average balance of $117 billion during the first half of 2003.
For investors, taking on some of Bank of America's mortgage risk provides an above-market return.
On a recent RESI deal, the single-B-rated part maturing in 2036 paid an interest rate of 13.95 percentage points over the one-month London interbank offered rate, according to a Standard & Poor's report on the transaction. That is a 15.35% yield in an environment where investors are demanding only about 8% to lend to single-B-rated companies in the high-yield bond market.
Why the superhigh yield? "It's a new concept for a lot of investors, and it takes time to understand," said Fitch's Mr. Gerity.
It appears investors may be getting more comfortable with the structure. A single-B-rated bond issued by RESI Finance in March offered a much higher yield of 11.7 percentage points over one-month Libor. One sold at the end of last year offered 20.2 percentage points over one-month Libor, according to S&P.
Some top holders of debt issued by RESI, including nonrated and private-placement transactions, are Aegon USA Investment Management Inc., AIG Global Investment Group and Fidelity Management & Research Co., according to New York-based market-data provider Lipper.
Bank of America wasn't available to comment on the RESI transactions.
Earlier this year, the company completed a similar deal to unload some exposure on a portfolio of more than $5 billion in consumer auto loans. In a research report, Bank of America called the auto deal a first of its kind, but declined to answer questions on the transaction.
Bank of America's Mortgage Twist
Lender's Structured Bonds
Reduce Exposure to Risk
Of Defaulting Homeowners
By CHRISTINE RICHARD
DOW JONES NEWSWIRES
July 15, 2004; Page C6
NEW YORK -- Mortgages are big business at Bank of America Corp., but the bank's exposure to mortgage risks isn't as big as some may think.
In a series of credit-market transactions, one rated within the past few weeks, the Charlotte, N.C.-based banking behemoth has reduced its credit exposure on at least $70 billion in conforming and jumbo mortgages.
Through the sale of structured bonds called real-estate synthetic investment securities, Bank of America has passed along to investors the risk of hundreds of millions of dollars of potential credit losses on a portfolio of billions of dollars of mortgages.
"It's a way of shifting exposure off their books," said Michael Gerity, senior director at Fitch Ratings in New York, which has rated several of the transactions.
These structured bonds, which carry ratings from midinvestment grade to midspeculative grade and are issued by RESI Finance Limited Partnership, are a new twist on mortgage-backed securities. While mortgage-backed securities pass along the payments homeowners make on their mortgages to investors, these synthetic securities pass along losses on a portfolio of mortgages.
In other words, when a homeowner defaults on a mortgage and the sale of the home results in a loss, that loss is borne by the securities holders, starting with those furthest down the ratings scale.
The most recently rated RESI deal included $164 million in securities, broken into eight portions with ratings ranging from single-A-2 to single-B-3 by Moody's Investors Service. The deal was based on a portfolio of $14 billion in jumbo mortgages purchased from various originators.
Brian Vonderhorst, an analyst at Standard & Poor's Ratings Group, said the structure used in the RESI transactions has been employed almost exclusively by Bank of America, though other financial institutions have shown interest in it.
While mortgages have performed well in recent years, analysts are becoming increasingly concerned how consumers will shoulder debt payments in a rising-rate environment. There is also concern that home prices, which have been boosted by falling interest rates, could decline as mortgage rates rise.
In supplementary financial data published yesterday with its second-quarter results, Bank of America reported its average balance of residential mortgages had increased to $157 billion for the first half of 2004 against an average balance of $117 billion during the first half of 2003.
For investors, taking on some of Bank of America's mortgage risk provides an above-market return.
On a recent RESI deal, the single-B-rated part maturing in 2036 paid an interest rate of 13.95 percentage points over the one-month London interbank offered rate, according to a Standard & Poor's report on the transaction. That is a 15.35% yield in an environment where investors are demanding only about 8% to lend to single-B-rated companies in the high-yield bond market.
Why the superhigh yield? "It's a new concept for a lot of investors, and it takes time to understand," said Fitch's Mr. Gerity.
It appears investors may be getting more comfortable with the structure. A single-B-rated bond issued by RESI Finance in March offered a much higher yield of 11.7 percentage points over one-month Libor. One sold at the end of last year offered 20.2 percentage points over one-month Libor, according to S&P.
Some top holders of debt issued by RESI, including nonrated and private-placement transactions, are Aegon USA Investment Management Inc., AIG Global Investment Group and Fidelity Management & Research Co., according to New York-based market-data provider Lipper.
Bank of America wasn't available to comment on the RESI transactions.
Earlier this year, the company completed a similar deal to unload some exposure on a portfolio of more than $5 billion in consumer auto loans. In a research report, Bank of America called the auto deal a first of its kind, but declined to answer questions on the transaction.