Call it a refinancing.
The sale of mortgage-backed securities has bounced back to precrisis levels and finance shops are staffing up to grab a bigger piece of the much-maligned market.
After dropping by about a third in 2008, the issuance of mortgage bonds came surging back last year to $1.96 trillion, just slightly less than the previous high in 2007, according to data compiled by the Securities Industry and Financial Markets Association. There is now a record $9.2 trillion in mortgage securities outstanding and if new issues continue at their current pace, a record $2.1 trillion of such instruments will be poured into the market this year.
These aren't the same securities, however, that swamped the financial world in late 2008. For one, they are comprised almost exclusively of conservative home loans; the commercial and sub-prime markets have all but disappeared.
Secondly, the bulk of the deals are being handled by Uncle Sam, the ultimate stamp of confidence in a still-shaky market. Ginnie Mae, Fannie Mae and Freddie Mac handled 72% of mortgage securities sales by volume in the first quarter of the year, some 126 deals, according to Thomson Reuters. In the same period in 2007, Fannie and Freddie comprised 15% of volume and Ginnie was not even on the list.
The giant MBS alchemists back then were Bank of America, JPMorgan, Lehman Brothers, Goldman Sachs, Deutsche Bank AG and Wells Fargo. None of those companies was on the top-10 list this year.
Even the FDIC is in the MBS game now, selling $2.5 billion in loans that it grabbed from failing banks in the first quarter.
To handle the surging volume, government agencies have been hiring. Ginnie Mae has increased its staff by almost a third since October 2009, hiring 18 workers.
The Federal Reserve now has about 30 people handling its portfolio of mortgage-backed securities. In an effort to stabilize the real-estate market, the Fed snapped up $1.25 trillion of MBS between Jan. 2009 and April 2010. It initially hired JPMorgan, Wellington Management and BlackRock to handle its orders, but eventually hired some MBS veterans and brought its trading in-house.
BlackRock declined to comment and Wellington Management did not return phone calls.
Wall Street Hiring?
Although Wall Street banks have backed away from issuing MBS, there is some evidence that they are building up teams to buy and sell such instruments.
After making some substantial cuts, UBS has hired 350 bankers in the fixed-income unit that handles mortgage securities and it is looking for another 100 to 300 people. UBS declined to answer questions for this article, but it told Swiss reporters at NZZ Online that it can no longer afford to steer clear of mortgage securities, given investor demand.
Ohmsatya Ravi, the lead MBS analyst at Nomura Securities International, said there is little excess talent in the market for real estate bonds.
"On the agency [or government-issued] side of the market, I don't think overall employment declined much over the past two to three years," Ravi said. "In the non-agency market, some of the people moved into hedge funds and set up their own funds buying [of] distressed securities, which has worked out pretty well."
Ravi was hired from Bank of America at the end of last year as part of a push by Nomura to expand its MBS offerings.
Boutiques are getting back into the mortgage game as well. Braver Stern Securities LLC has spent the past two years building a team, swiping institutional MBS business from bigger rivals. Most recently, the New York-based company hired five mortgage professionals to open an office in Chicago, including David Connelly, an MBS veteran from the ranks of Bear Stearns.
"There is a great fight for talent right now," said George Kenny, a former Merrill Lynch employee who now heads fixed income sales at Braver. "There was such an exodus two years ago that many of the bulge-bracket firms were -- and still are -- understaffed with quality people."
Meanwhile, Braver is still on the hunt for workers and looking to expand in Boston, London and the Southeast.
"I'd be very surprised if we don't have offices in each of those locations in the next six to nine months," Kenny said.
Despite the recent boom in activity, MBS analysts and traders don't expect real estate bonds to inflate another credit bubble anytime soon. Investors have become better at analyzing mortgage debts, they noted. Even relatively conservative money managers are buying MBS, emboldened by the flood of government-backed mortgage securities in the market.
"I don't think investors are worried about [the] credit quality of agency MBS," Ravi said. "But clearly, issuance in subprime and nonagency MBS is not going to go back to 2005 levels anytime soon."
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