Mortgage bond abandoned after the financial crisis reemerges

A mortgage bond that fell out of favor after the financial crisis has been issued by a New York private equity firm; one of a series of unconventional structures to emerge in the past year.

A unit of Cerberus Capital Management LP issued bonds last week that were backed completely by home-equity lines of credit, The Wall Street Journal reported.

Financial products that culled together arcane pieces of the mortgage market have become less common in the decade since the collapse of the housing market, when entities backed by the federal government propped up the mortgage market. But some of the products have slowly started to come back in favor.

“We are starting to have a lot more creative issuance around mortgage credit,” Neil Aggarwal, Semper Capital Management’s head of trading and deputy chief investment officer, told the Journal. “I wouldn’t be surprised if there’s more to follow after this transaction.”

Cerberus Capital’s issuance, valued at $174 million, received a triple-A rating from Fitch Ratings and three other agencies.

Home-equity lines allow borrowers to pull cash out of their properties as needed. When the financial crisis hit and housing prices fell, many owners who had been drawing from equity generated by rising prices ended up owing more than their properties were worth.

While issuers were reportedly cautious about new mortgage bonds, there had been a recent shift toward bringing certain structures back, the Journal reported, including mortgages issued for people with hard-to-trace incomes. [WSJ] — Sylvia Varnham O’Regan