Wells Fargo readies its first post-crisis mortgage bond



Signage at a Wells Fargo & Co. bank branch.

Wells Fargo &Co.

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  is preparing to sell mortgage bonds to investors, only the second such big bank to offer a deal like that since the financial crisis a decade ago.

So-called “private-label” securitizations, in which a lender bundles together hundreds of income-producing assets and sells pieces of the whole to investors who want fixed income, disappeared after the housing shock, and the move is likely more of a one-off trial run than the start of a resurgence of that market.

That makes the deal not so much a reminder of the mortgage market that once was as a glimpse of the state of the housing finance system now.

Banks and other lenders sell the mortgages that they make because it’s hard for them to hold on to those loans for long periods of time. Even though most borrowers won’t hold their 30-year fixed-rate mortgages for the full term, interest rates can fluctuate wildly over a few weeks – let alone years. What’s more, selling those mortgages brings in money that allows lenders to make new loans.

The biggest buyer is usually the government. In the first quarter of this year, lenders sold 69% of their mortgages to Fannie Mae

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 , Freddie Mac

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 , the Federal Housing Agency or the Veterans Administration, according to data compiled by the Urban Institute. Lenders held 28% in their own portfolios. Private-label securitizations made up the remaining 1% of the total.

Read: Americans are still shunning adjustable-rate mortgages 10 years after the crisis

Lenders stopped securitizing their mortgages after the housing crisis in large part because investors wouldn’t touch any asset that didn’t have a government guarantee.

In different periods in the years since the crisis, it’s been advantageous for banks to hold, or “portfolio” the mortgages they make. That’s because fees charged by Fannie and Freddie doubled after the crisis. Banks were able to pass on those extra basis points to their borrowers, while taking essentially no credit risk, because only the most pristine borrowers were qualifying for mortgages.

Now, conditions may have shifted somewhat. “It’s a matter of economics,” said Mark Zandi, a longtime housing market expert and the chief economist at Moody’s Analytics. “There’s a lot of demand from investors for mortgage credit risk.”

At the same time, the higher “guarantee fees” charged by Fannie and Freddie are starting to chafe a bit for lenders. “That’s making it more difficult for them to be competitive,” Zandi said.

Also see: Mortgage lending is so tight, more people aren’t even bothering to apply

And Wells Fargo is in a unique position. After a slew of customer scandals, the Federal Reserve in February said the bank would not be able to hold any more assets than it did at the end of 2017. Wells did not respond to requests for comment for this story.

(JPMorgan Chase

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  is the other big bank that’s securitized mortgages, according to a Fitch spokesperson.)

The deal will include 660 fixed-rate mortgages that homeowners have held for an average of 17 months, according to a Fitch Ratings report on the deal. The mortgage holders have about 27% equity in their properties, and the average FICO score is 779, which Fitch calls “indicative of very high credit-quality borrowers.”

“The pool’s attributes, together with Wells Fargo’s sound origination practices, support Fitch’s very low default risk expectations,” the ratings agency noted. All of the loans that will be included in this deal were originated by Wells Fargo itself, rather than by brokers, another “key strength,” according to Fitch.

Given the squeaky-clean credit characteristics of the mortgages in the deal, it’s entirely possible Wells Fargo may assume it will be giving up a little yield in order to attract investors, Zandi noted. One way to think of a new deal in a long-dormant market like this is “re-opening a pipe that’s been shut for a few years,” he said.

Still, Zandi thinks that for the foreseeable future, the PLS market will be “a shadow of what it once was.”

That’s partly because the government will continue to play an outsize role as the buyer of mortgages from originators, but it’s also because investor appetite for mortgage-related fixed-income products has shifted. Since 2013, Fannie and Freddie have been selling pieces of their own portfolio via transactions known as “credit risk transfers.”

Over the past few years, those deals have totaled about $2.1 trillion, and the market for them is “big, liquid, and growing,” Zandi said.

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