Can JPMorgan Save the Private-Label MBS Market?

JPMorgan Chase is planning a fourth quarter spurt of mortgage bond sales that would keep afloat the market for securities not guaranteed by Fannie Mae and Freddie Mac.

The country's largest bank is sending word to investors that it may sell as much as $1 billion in prime, jumbo residential mortgage-backed securities through multiple issuances in the fourth quarter, people familiar with the plans said.

Issuers have sold only $4.6 billion in private label mortgage securities this year — a third of last year's total, despite early forecasts of comparable volumes.

"The rest of the year is going to be back-loaded with issuance," said Rui Pereira, managing director at Fitch Ratings. "But given how dead the first half was, I'm not sure the market will be able to catch up by year-end."

Investment banks act both as underwriters of deals and securitizers of loans they either originate themselves or buy from others. These days, private-label MBS are typically composed of jumbo loans to highly creditworthy, wealthy borrowers with pricey homes, with balances larger than the government-sponsored enterprises' limit. But over the past year it's been harder to amass such loans for securitization, since commercial banks looking to put assets on the balance sheet have bid competitively for them.

JPMorgan strategists have cut their forecast for as much as $20 billion in projected annual issuance down to as little as $5 billion. Even the more optimistic projection would pale in comparison to the pre-crisis peak when as much as $2.2 trillion hit investors' books in a year.

There are high hopes for a resuscitated securitization market. Investment bankers are flying from New York down to Miami on Sunday for what may be the largest post-crisis gathering of investors, issuers and service providers. Some 3,700 participants are registered to attend the ABS East conference at the sold-out Fontainebleau Miami Beach Hotel. Two additional hotels reserved for attendees are also booked to capacity, according to event organizers.

Still, the multitude of challenges in front of a true market thaw is daunting, even aside from GSE reform.

JPMorgan is one of only several investment banks with active conduit programs. Credit Suisse and Citigroup also acquire and package mortgages into bond sales. Citigroup has sold only two pools of acquired home loans since the crisis. JPMorgan has sold five residential mortgage securitizations since the crisis — all of them since March last year.

The bank's first sale of 2014 stumbled out of the gates and showcased one of the many problems standing in the way of a market revival. It took JPMorgan two weeks in February and two rounds of downsizing before enough investors filled the books for a sale $30 million less than the pre-marketed target size, Standard & Poor's and Kroll Bond Rating Agency rating reports show.

Investors balked at the deal's representations and warranties, and the transaction sparked the latest industry chatter over how to reconcile the interests of investors and issuers, Sharif Mahdavian, managing director at S&P, said at a spring industry conference.

"This is a buyer's strike," a managing director at a one of the largest bond investors in the country said this week. "The deals out there are very simple, but the docs are lengthy and complex, and they require counsel to come in to look at each one."

The strong whole loan bid from regional banks, for example, to buy hybrid mortgages is also still strong, but it may be easing. This month Redwood Trust, one of four active mortgage real estate investment trusts with access to the Federal Home Loan Bank, sold only its third new issuance of the year, which included several high-quality, but non-qualifying mortgages that fall outside the Consumer Financial Protection Bureau's new guidelines.

Bankers and investors are beginning to vocalize previously-reserved interest to finance non-QM product with securitization as both end-game and facilitator. That market, according to Deutsche Bank, could eventually grow as large as $50 billion a year, dwarfing as they stand jumbo loan deals, which finance the market for the country's largest and most expensive homes.

Redwood also this week auctioned for the first time ever notes it had retained in previous bond sales, testing investor appetite below the highest-quality credit ratings.

"We consider this is a positive development," said Greg Reiter, managing director at Wells Fargo Securities. "Investors are showing interest for notes other than the AAA's and it could encourage and support the new issue market for not only the AAA's, but also AA and A notes. Beyond 2014, we might even see lower rated notes offered," Reiter told clients in a report emailed on Thursday.

Reiter estimates jumbo loan securitizations could add $1.4 billion to the market by year-end. Other strategists expect Redwood to issue another one to two deals this year, and to be joined by other mortgage REITs such as Two Harbors Investment Corp.

Two other areas of activity in the residential mortgage bond universe are more lucrative for investors, too. Those areas include the massively popular credit default risk transfers from Fannie Mae and Freddie Mac, which have passed to the private market $8.27 billion this year. The second is sales of higher-yielding non-performing mortgage securitizations, totaling $8.9 billion year-to-date, Wells Fargo data show. The pool of those legacy loans is winding down rapidly, and banks' supply of the in-demand assets may be in the range of $128 billion, according to Fred Small, senior vice president at Compass Point Research & Trading.

JPMorgan spokeswoman Jessica Francisco declined to comment.