Mortgage-backed securities, the villains of the recent financial meltdown, are back. But while government officials hoped their re-emergence would result in more bank lending, to date, that hasn’t been the case.
Some $94 billion in new deals came to market in the third quarter, according to Dealogic, a firm that tracks financial data. That’s a far cry from the $339 billion issued during the height of the market in the second quarter of 2007, but it’s a heck of a lot more than the $9 billion done in the fourth quarter of last year. Nearly all of the deals that have surfaced are backed by residential rather than commercial loans.
The securities’ re-emergence is a mixed bag.
Many blame the securities for the market downturn. While it used to be that banks would originate loans and then package them to get them off their books, the securitization process became so lucrative, the tail began to wag the dog, with banks issuing loans just to feed the securitization machine. But the loans they extended became riskier and riskier and default rates are now at record levels. Indeed, some 11.6 percent of mortgage borrowers in the New York City area are currently underwater — a figure that could spike to 77 percent by the first quarter of 2011, according to Deutsche Bank.
Late payments on commercial MBS, for instance, rose to 3.64 percent in September, according to Moody’s Investors Service. That figure was just .54 percent a year ago.
But like an unwelcome visitor who serves a beneficial purpose, the securities may be essential to getting banks to lend again. Banks must set aside capital against their loans, so the more loans they can get off their books by packaging them into MBS, the less capital they need to set aside and the more they can lend.
It’s for that reason that the Federal Reserve has been pumping billions of dollars into the market, through its Term Asset-Backed Securities Loan Facility, or TALF, program. By lending money to investors to buy MBS, federal officials hoped they could nurse the market back to health. Since July, the Fed has made about $43 billion in TALF loans to investors, sparking a small rally in the asset-backed securities markets. The problem is, banks may be packaging their loans again, but they’re not using the proceeds to make new ones. They’re pocketing them.
“You may have new MBS issues, but the money is not ending up on the street,” said Shari Olefson, a real estate attorney with Fowler White Boggs in Fort Lauderdale, Fla. “Banks aren’t making loans. They’re taking the money to beef up their balance sheets.”
Indeed, demand for commercial real estate in New York and Florida, for instance, has declined since August, the Federal Reserve said.
The main problem, according to businesses wanting to purchase property, was an inability to obtain credit. Commercial mortgage lending, across all property types, has fallen an average of 54 percent in the last year, according to the Mortgage Bankers Association’s most recent data. The drop offs in volume ranged from a 21 percent decrease in multi-family property loans to an 81 decrease in loans for office properties.
“With declining property values, banks are afraid to lend because they fear the new loans will soon be underwater, not unlike the loans they made last year,” said Susanne Trimbath, CEO of STP Advisory Services in Omaha, Neb.
Trimbath said the TALF program is just another way for the federal government to bail out the banks.
“But no federal agency has a tool to force banks to make loans,” she said.
Banks aren’t likely to begin lending again until they have a better handle on whether we’re through the residential and commercial mortgage crisis. There are a still a lot of residential mortgages slated to reset in the next year or two, which could ratchet up the default rates.
“PIMCO announced it had reduced its MBS holdings to its lowest level in four years,” said David Wind, president of Guaranteed Home Mortgage Company in White Plains, NY. “That’s not a vote of confidence for the residential securitization side.”
On the commercial side, many of the outstanding loans expire in the next two years, and it remains to be seen whether borrowers will be able to refinance them.
“There are a series of very significant adverse circumstances yet to happen,” Wind said. “The general public is just now realizing there’s doom on the commercial side.”