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JPMorgan's coming mortgage deal embodies the U.S. housing finance quagmire. The bank is looking to sell its first home-loan bond without government backing since the financial crisis. That hints at a belief in this part of the securitization market among both lenders and investors. But until housing finance rules are clarified and the funding advantage enjoyed by Fannie Mae and Freddie Mac is withdrawn, these deals will remain rare.
If the handful of other recent deals from Redwood Trust and Credit Suisse are any indication, JPMorgan should have little trouble selling the paper. With interest rates so low, bondholders are desperate to find extra juice – and those focusing on mortgages aren't getting much return from securitizations using government-backed home loans. On top of that, the few private-label deals that have come to market are packed with good loans and a far bigger buffer against losses than before the crisis.
So far, some $12-billion (U.S.) of these deals have been sold in the past two years. That, though, is barely a speck compared to the $1.7-trillion mortgage-backed security market. Last year, agency bonds accounted for 99.3 per cent of all mortgage bonds, according to Freddie Mac.
It is significant that the investment bank allied with one of the nation's top-four mortgage lenders is dipping its toes back in the private-label pond. That gives hope that major players still think there is a role for securitization to play in financing home loans without state aid.
For now, though, it's unlikely to herald a slew of similar deals. For starters, the economics still don't work. Fannie and Freddie still have a distinct advantage both in the cost of their capital and in what they charge for their services – especially the guarantee fee. That effectively prices private capital out of the market.
In addition, several crucial rules remain uncertain, such as which mortgage loans will and won't require lenders to hold skin in the game and what effect changes to bank capital requirements will have. The JPMorgan deal is a handy reminder that private-label securitization is not completely dead. But until Washington acts, taxpayers remain on the hook for the mortgage market.