JP Morgan is trying to sell new securities that would pass along most of the credit risk on $ 1.9 billion in mortgages, in an attempt to revive a debt market that has been largely left to the government since the financial crisis.
The largest US bank by assets is expected to price the residential mortgage-backed deal over the next two weeks. JP Morgan would hold 90% of the deal by keeping the safest parts, or the most senior tranches, and plans to sell off the riskier pieces to investors.
Banks issued trillions of dollars worth of bonds backed by home loans in the years before the financial crisis but have had trouble winning over investors burned when the market crashed. Financial institutions issued $ 61.6 billion in private mortgage bonds in 2015, up from $ 54.1 billion in 2014 but a fraction of the $ 1.19 trillion issued at the peak of the housing boom in 2005, according to data from trade publication Inside Mortgage Finance.
Government-sponsored entities Fannie Mae and Freddie Mac have dominated the market in their absence. The two companies have recently been selling new securities that use derivatives to unload the risk of default on the mortgages they guarantee.
The new deal is JP Morgan’s first “house transaction” since the financial crisis, meaning it is entirely backed by mortgages the bank owns. The pool includes a mix of more than 6,000 mortgages, both newer and refinancings, around 75% of them conforming with the underwriting standards set by Fannie and Freddie. Most of the mortgages are made to individuals with high credit scores.
JP Morgan could have sold those loans directly to Fannie and Freddie, so the deal indicates it thinks it can get a better deal with private investors or holding parts on its balance sheet.
The New York bank hopes this new method could offer more competitive pricing and help broaden the market for such deals, people familiar with the matter said.
JP Morgan is using the Federal Deposit Insurance Corp’s safe harbour, which isolates them from the assets and protects investors if the mortgages go bad. The deal is the first of its kind to be issued by a major bank, according to Fitch Ratings, which gave the securities mostly investment-grade credit ratings.
“This is an important step to bring private capital back into the mortgage market,” JP Morgan chief operating officer Matt Zames said.
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Serena Ng contributed to this article, which was published by The Wall Street Journal