The Federal Reserve Bank of New York resumed auctions from it Maiden Lane II portfolio amid a non-agency market that continues to see spread pressured by oversupply and a deteriorating macroeconomic backdrop.
The Fed's ninth auction and largest bid to date offered investors a list of 73 mortgage bonds with a current face amount of more than $3.8 billion. According to market reports 17 bonds were being backed by prime and Alt-A mortgages.
Most of the remaining senior bonds were backed by sub-prime and home-equity collateral. The latest auction closes on June 9, the New York Fed said today in a posting on its website.
The Fed who became regular seller in the market with its weekly ML II auction halted sales at the end of last month and said that the next sale was slated for June 6th. In the interim since the Fed halted its auction, pricing for non agency RMBS paper has continued to widen on the back of greater macroeconomic deterioration.
According to an informal survey of investors conducted by Deutsche Bank, the recent sales of subprime and Alt-A MBS by the Fed and, most recently, sales announced by Dexia, a Belgian and French bank; were listed as key reasons for the sector’s poor performance.
"The repricing of subprime MBS has come with a steady beat of bad news about home prices and mortgage servicing, although opinions vary about how much of the repricing has come from these fundamentals," said analysts at Deutsche Bank in a report.
For the most part the deteriorating fundamentals had been broadly anticipated, said investors participating in the survey.
According to the Deutsche Bank report, analysts and investors said they expected falling home prices since at least the beginning of the year. Timelines from delinquency to liquidation have extended, but the survey participants said it is a continued trend that has been in place since 2008.
The proposals for national servicing standards from at least six U.S. regulators and a joint investigation into foreclosure practices by 50 state attorneys general has raised the prospect of more expenses and greater losses for investors in non-agency MBS, but nothing definitive on servicing has emerged.
"One chief risk officer of a fund invested primarily in non-agency MBS said last week that he had not been surprised by either the latest home prices or the servicing news," said analysts in the report. "The fund’s assumed loss severities on its holdings had remained unchanged in recent months.
"The head of research at a second fund that primarily holds non-agency MBS said the fund had thought about increasing its credit exposure until the Maiden Lane sales started. This fund had already assumed a 2011 drop in home prices of between 5% and 10%."
However, analysts said that the head of MBS investments at a third fund that played a significant role in TALF, put more weight on fundamentals and added rates. "The consistency of the bad news on home prices and servicing had taken out some of the upside that many investors thought they owned earlier in the year," explained Deutsche Bank analysts. "That warranted some price concession."
