One of the major contributors to the 2008 credit crisis/financial crisis was the collapse of non-agency mortgage backed securitizations. In its aftermath, the business of non-agency mortgage origination and securitization by U.S. investment banks virtually ceased to exist. Bank securitization desks closed en-masse as investors refused to accept mortgage credit risk in any form.
Over a decade later, we have begun to see the banking sector restart their non-agency mortgage businesses. In some cases, these new securitizations are repackaging of old loans, but banks have also issued new bonds with new loans.
The WSJ recently published an article indicating a large uptick in new mortgage securitizations. Published estimates range from $70 billion to $180 billion of new issuance last year, and year-to-date 2019 already exceeding that. This is a far cry from the trillion dollar-per-year issues that we saw prior to the credit crisis, but clearly there is an appetite for these bonds in a market starved for yield and the banking sector that is gearing up to provide what investors want. The article pointed to the fact that a number of banks have begun reconstructing their mortgage securitization desks; clearly an indicator that more securitizations are on the horizon.
We expect that most of the glaring errors and sloppy documentation that was evident in pre-crisis securitizations will be avoided. There will likely be few, if any, issues related to banks neglecting to review loans. Based on the heavy fines and losses levied against them related to representation and warranty breaches, banks will certainly do better diligence on the underlying loans than they did before the crisis.
We believe that the influx of new securitizations will create additional capacity in the market and will be an attractive relative source of yield for investors. More importantly, we also believe that these new securitizations will have problems and will likely give rise to special situation opportunities (investments in securities that may be mispriced due to structural or market driven factors) in the years to come. It was once said that “history doesn’t repeat itself, but it often rhymes.” Memories are short when it comes to Wall Street, and we fully expect more opportunities in these new issuances, even if they are not identical to the opportunities that we find in pre-crisis bonds.