The Real Deal New York

Private investors are buying more mortgage loans and reselling them as bonds

If the trend intensifies, it may reduce the roles of government-backed Fannie Mae and Freddie Mac in housing finance
March 10, 2019 02:35PM

(Credit: Pixabay)

Private investors are acquiring a growing volume of mortgage loans, a practice long dominated by government-backed Fannie Mae and Freddie Mac.

Banks and other financial institutions are buying more mortgages that meet the standards of Fannie and Freddie, then selling them in the form of bonds without government guarantees.

Recent issues of these so-called private-label securities comprised largely, or solely, of mortgage-loan pools have come from JPMorgan Chase & Co., Flagstar Bancorp Inc., and real estate investment trusts Chimera Investment Corp. and Redwood Trust Inc.

In a similar middleman role, Fannie and Freddie buy mortgage loans from lenders and sell them to investors, and the government assumes some of the risk of bad loans.

But in the last year or so, investors have bought growing volumes of private mortgage bonds without government guarantees and accepting additional risk for a bigger potential return on investment.

The volume of loans that conformed with Fannie and Freddie standards and were packaged into private-label securities totaled $3.9 billion last year and $4 billion in 2017. Both amounts were approximately three times greater than the volume in 2016, according to broker-dealer Amherst Pierpoint Securities LLC.

Some legislators and policy makers want to downsize Fannie and Freddie because they want government to play a reduced role in the $11 trillion mortgage industry. But the market, not Congress, may reduce the role of Fannie and Freddie in real estate finance if the volume of private mortgage bonds continues to grow.

The Urban Institute reported that 45 percent of mortgages originated during the first nine months of 2018 ended up in Fannie and Freddie securities. The most recent peak in this proportion was 65 percent in 2008. [Wall Street Journal]Mike Seemuth