A mortgage market that has seen rather anemic collateralized mortgage obligation issuance for the current year has gotten inundated recently, sources say, as a wellspring of Ginnie Mae II paper got tapped last week amid market-wide speculation about the status of a $13 billion First Union bid list.

While market players heard a mixed bag of rumors about the colossal bid list over the last several weeks, the most popular opinion last week among market sources was that the bid list was sold directly to Freddie Mac as whole loans.

Freddie Mac would not return calls regarding the transaction and a spokeswoman from First Union declined to comment.

In previous weeks it was reported that the sale of the bid list was held up due to certain key players at First Union being on vacation.

"I don't believe that at all," said one MBS veteran. "Anyone who would venture that as an opinion should be taken out and flogged."

"I heard that [the sale] has come and gone," said an MBS trader. "It was sold entirely as whole loans, directly to Freddie Mac, a couple of weeks ago. First Union had a big portfolio of whole loans that they bought, and they must have figured, Why securitize it?' It went into their retained portfolio, and there is no need to go through the effort and expense of securitizing this stuff."

Whether a GSE was involved in the transaction or not, however, the sale of the bid list led market participants to wonder whether there would be enough depth in the market to absorb $13 billion in whole loans, even if it was offered to the Street.

"The Street would probably not be able to absorb it," said an analyst. "If it were offered to the Street, it would probably have to be done as tiers, and done as securities instead of whole loans, and probably in multiple groupings.

"But with the GSE involved, it is a very economical solution for both parties. They've got the size on the sellside and the buyer certainly has the capacity."

The prospect of Freddie Mac possibly buying such a huge bid list directly from First Union did not completely surprise market observers. In fact, some sources said that it made perfect sense.

"It doesn't make any sense for them not to do it this way," said another MBS trader. "Is it a precedent? Yes and no. If it is a matter of keeping the Street happy versus getting better execution for the seller, clearly it is a good purchase for the buyer. I mean, what would the Street do in those circumstances?"

The source also noted that this is a sensitive time for such sales because of the advent of electronic trading systems, where "whoever clicks faster will get the trade."

As to whether the Street should have felt "left out" of the deal, the source compared the situation to the sale of Kidder Peabody's derivative inventory to Bear Stearns in 1994: "Should the Street have felt cut out when Kidder sold [it]....to Bear in 1994? To me, there's a minimal difference between the two scenarios."

Another Street analyst did not read much into the prospect of a $13 billion sale of whole loans to a GSE: "Clearly, if they started buying securities directly from the buyside, that would not be good for mortgage desks. But buying whole loans is a whole different business. I won't read too much into it."

Ginnie Mae IIs Surface

At least two Ginnie Mae II CMOs got printed last week off of 7.5% GNMA bonds, sources said.

"It's interesting that it coincided with the huge Fannie Mae sale," noted Michael Hoeh, head portfolio manager at Dreyfus Corp. "You would think that the CMO arbitrage would not be there at this point, but where there's a will there's a way. Ginnie II's are cheap enough that it probably made some thin level of profitability for the deal."

Indeed, the appearance of the Ginnie Mae IIs - which are generally considered the cheapest collateral in the mortgage market - comes at a time when CMO issuance is at a low.

According to Hoeh, there have only been 29 Fannie Mae CMO issues year-to-date, and only four of those were for more than $1 billion. Additionally, many of these deals were re-Remics of existing paper.

Comparatively, for the same period of time in 1999, there were 65 Fannie CMOs, and 17 that were for more than $1 billion.

"It is very hard in an inverted yield curve environment," Hoeh said. "It will only change if the curve flattens out. In the non-agency CMO market, all transactions have been passthroughs that have been tranched. The yield curve must change dramatically for anything significant to happen."

Ginnie Mae II's were trading approximately 17 ticks behind Ginnie I's, which is a substantial discount - but they have typically never traded that far behind, sources said. Therefore, this would seem to make Ginnie II's good candidates for CMO deals, especially for total rate-of-return investors.

"Investors are worried about the Fannie-Freddie mandate going away, which I don't buy into," Hoeh added. "You'd prefer Ginnie II: they are more CMO-arbitrageable, and they have similar prepayment characteristics."

"There has been good inquiry for Ginnie paper," noted an MBS trader. "They are put into accounts as passthroughs or into CMO deals. Lots of Ginnie paper left the Street the other day."

The trader also said that this phenomenon was clearly a function of Ginnie II's being even-dollar to Fannies, though that arbitrage has since disappeared.

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