A number of upstart players are trying to break into the mortgage-backed securities market this year, from both sides of the Atlantic Ocean.
Nomura Securities, Greenwich Capital Markets, BNP Paribas and Barclays Capital are all said to be in the process of bulking up on fixed-income staff, especially in residential and commercial mortgages. Even more intriguing, a host of German banks are said to be mulling the idea of becoming active players in U.S. mortgage-backeds, which could greatly alter the market landscape.
Some market sources can't believe that one of the hottest sectors in the fixed-income markets this year is mortgage-backeds, a sector known for its maturity, low profits and lack of excitement. "That's all we need," groused one long-term mortgage player about the prospect of new competition. "Let's split up the meager profits we get from this business even further."
Yet continuing volatility in the equity markets has made bonds an attractive haven for most Street shops this year, and many banks have begun shifting their efforts toward structured finance while simultaneously reducing staff in equities and investment banking.
The MBS market is currently dominated by four major players - Credit Suisse First Boston, Salomon Smith Barney, Bear, Stearns & Co. and UBS Warburg - with many rivals close on their heels. CSFB led the pack as of press time, with $18.8 billion in new deals underwritten year to date, compared with $28.3 billion for all of 2000, according to Thomson Financial.
The upstarts, however, believe there still is room at the MBS table. So far, most of the MBS market's new aspirants are still in the planning stages and have scant league table credit to show for their efforts. Yet Nomura and Greenwich in particular are bent on establishing solid MBS presences, and have spent much of the year so far hiring veteran mortgage officials and trying to win deal mandates.
Nomura's executive managing director and head of fixed income Alex Noujaim, for one, argues that recent dealer consolidation in the market has opened up some room. "I think clients are sensing that they may have too much concentration risk (in underwriters) and are looking for new players," he said. "It's been a great hiring market for us."
Greenwich is keeping pace, as it is now looking for up to 10 officials to beef up its nascent collateralized debt obligation group, as well as other pros to expand its MBS underwriting staff, market sources said.
It's not just the upstarts that are looking for talent. One observer said he expected J.P. Morgan Chase to mount an offensive in MBS at some point this year, noting that the company has well-regarded MBS veterans such as Kevin Finnerty on its payroll. The shop is currently ranked ninth.
The most intriguing newcomers for the MBS market, however, would be top-rated German banks, including Commerzbank, Westdeutsche Landesbank and HypoVereinsbank. While none of the banks have publicly said they have intentions to enter the U.S. mortgage market, such a move would be logical, market sources said.
Already, the German banks have become more active purchasers of U.S. mortgage securities, and it would make sense for some banks to ultimately try to become traders and underwriters of such bonds. "They are very experienced residential and commercial lenders in their own countries," said Michael Youngblood, head of mortgage research for Banc of America Securities. "They are the equivalent to Fannie Mae and Freddie Mac and have very stable earnings."
Because the banks are generally tripleA-rated and have ties to the German government, they could act as the near-equivalent of the federal agencies, and as such command serious purchasing power in U.S. mortgages. Some market players believe that the Germans could get ambitious enough to go after some lower-ranked U.S. shop's mortgage desk in an attempt to jump-start a mortgage business.
Already, Commerzbank is making some headway into the U.S. mortgage market. It was ranked thirteenth in the first quarter, with $953.1 million in deals underwritten, compared with zero deals in the same period in 2000, according to Thomson Financial.
The U.S. market is appealing to the German super-banks because as they have prospered, the banks have found fewer buying opportunities in Europe. "As the banks have expanded, their profit margins are becoming diminished, so they are looking for larger markets," said David Montano, U.S. head of mortgage backed research for CSFB. Montano added that he has not seen indications that the banks would start underwriting U.S. bonds, however.