According to an article published today by the Wall Street Journal:
"The market for mortgage bonds that aren't backed by the government suffered a setback this month, when one offering was shelved and another had to slash its price amid tepid investor demand".
"The market for mortgage bonds that aren't backed by the government suffered a setback this month, when one offering was shelved and another had to slash its price amid tepid investor demand".
"The struggles reflect the fits and starts suffered by banks and mortgage finance firms trying to revive the market for bonds backed by mortgages without government support, or so-called nonagency debt. The market for such bonds essentially collapsed under high default rates and poor investment performance during the financial crisis, following trillions of dollars of issuance during the housing boom.
The market was largely dormant until earlier this year, when more frequent sales to investors hungry for higher-yielding bonds lifted volume for 2013 to $12 billion. But investors have become more demanding since U.S. Treasury yields started rising in May.Government officials and regulators have been eager for nonagency mortgage market to recover, anticipating it can fill a void in home loan finance as they work to wind down U.S. housing-finance firms Fannie Mae and Freddie Mac. To reduce the roles of Fannie and Freddie, the Federal Housing Finance Agency is requiring the firms to sell debt that transfers some risks of default to private investors.
Investors remain especially concerned with the impact rising interest rates could have on nonagency bonds backed by jumbo loans–the ones packaged up by PennyMac and Shellpoint. Jumbo loans are those that exceed the $417,000 limit for government backing in most regions.
The Jumbo loan borrowers, are typically the slowest to refinance their debt as mortgage rates increase, which means mortgages can remain in the bonds longer than anticipated. That leaves investors with a bond filled with longer-term assets that pay lower rates than newer bonds, which pushes down the value of the debt.
Investors also worry they will have trouble exercising their right to demand lenders repurchase bad mortgages, a practice that at the heart of legal fights over boom-era loans. And the small size of the new-issue jumbo bond market makes it harder to trade the issues, discouraging some investors."
