Shellpoint Partners LLC, the housing lender backed by mortgage-bond pioneer Lewis Ranieri, sold its first securities tied to home loans without government backing after restructuring the debt to lure investors.
Shellpoint had postponed the $251 million offering last week, said four people with knowledge of the transaction. The company earlier this week increased the extra yield being offered over benchmark swap rates, then underwriter Credit Suisse Group AG (CS:US) offered a restructured deal today that gives some investors more protection against borrower defaults, one of the people said.
The offering was delayed and reworked after credit markets were roiled by Federal Reserve Chairman Ben S. Bernanke comments that laid out a potential timetable for scaling back $85 billion of monthly bond purchases. That expanded relative yields on competing investments and lifted interest rates that may extend the lifespan of mortgage bonds by slowing the pace of homeowner refinancings or sales. Transactions this month probably have been more difficult mostly because of market volatility, since the underlying loans haven’t gotten riskier, according to Sharif Mahdavian, a senior director at Standard & Poor’s.
“I still think the future’s bright” for the market, though deal volumes may slow, Mahdavian, who helps rate residential-mortgage bonds, said today at an S&P conference in New York.
Eric Kaplan, a managing director at New York-based Shellpoint, and Drew Benson, a spokesman in New York for Credit Suisse, declined to comment. Ranieri, who helped expand the mortgage-bond market in the 1980s while at Salomon Brothers Inc., is Shellpoint’s chairman and his Ranieri Partners LLC is a part-owner of the firm.
In its latest form, a top-rated $235.4 million portion of the Shellpoint deal was broken up into three pieces, said one of the people familiar with the offering, who asked not to be named because the transaction is private.
The largest, a $158.8 million slice, provides protection against losses of 20 percent on the underlying loans, up from 10 percent in the initial terms, the person said. The debt was sold at a spread of 2.85 percentage points.
The entire top-rated portion had been offered earlier this week at 2.95 percentage points, up from as much as 2.45 on June 21, two of the people said. The new lowest-ranking, $25.8 million slice of that portion was priced today at a spread of 3.3 percentage points, one of the people said.
Investors may have wanted more protection in part because about 5 percent of the loans in the deal were made to foreigners living in the U.S. and because credit scores of other borrowers fell after the loans were made, according to David Land, a money manager at St. Paul, Minnesota-based Advantus Capital Management Inc., which oversees about $26 billion.
“That’s a reason we may not participate,” he said.
Sales of debt known as non-agency mortgage securities had been recovering after freezing five years ago amid tumbling home values and soaring defaults, following issuance of $1.2 trillion in each of 2005 and 2006. Deals tied to new loans exceed $7 billion this year, up from $3.5 billion in all of last year, according to data compiled by Bloomberg.
Even before Shellpoint’s deal, investors had been demanding wider spreads amid the expanding supply and concern that the notes yielded less than government-backed debt. Scott Simon, who then headed mortgage-bond investing at Pacific Investment Management Co. and has since retired, called new non-agency securities “insanely expensive” in February.
Redwood Trust Inc., the most-active issuer, sold top-rated bonds at a spread of 2.21 percentage points on June 11, compared with 1.75 percentage points in April and as low as 0.97 percentage point in January. The Mill Valley, California-based company and other issuers have been issuing bonds tied to jumbo mortgages.
Jumbo home loans are ones larger than allowed in government-supported programs, currently as much as $729,750 for single-family properties in some areas. For Fannie Mae and Freddie Mac loans with the lowest costs for borrowers using 20 percent down payments, limits range from $417,000 to $625,500.
Relative yields on Fannie Mae (FNMA:US) securities trading closest to face value have climbed to about 1.39 percentage points higher than an average of five- and 10-year Treasury rates, from 1.15 percentage points on April 30. The average cost of new 30-year, fixed-rate home loans climbed yesterday to 4.57 percent from a record low 3.36 percent in December, according to Bankrate.com.
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