For the second year in a row, mortgage-backed securities powerhouse Lehman Brothers hit the No. 1 spot for year-to-date MBS securitizations, underwriting $35.1 billion in mortgage-backed deals for the first nine months of 1999, according to third-quarter findings from Thomson Financial - Securities Data Co.
Though the bank's proceeds for the same time frame decreased from last year's $50.4 billion, Lehman has maintained a No. 1 manager ranking consistently for the past two years, making them the reigning kings of MBS issuance.
"The diversification of business that we do within different areas and the way they cross over into other mortgage-related businesses is very complete and comprehensive versus our competitors," said Martin Harding, a Lehman Brothers managing director and co-head of MBS and ABS finance. "We have a very diversified and balanced approach to the marketplace, doing everything from the first reverse mortgage securitization this past quarter to standard conforming deals."
The most notable highlight for Lehman during the third quarter was certainly its role as lead agent on the Financial Freedom Senior Funding Corp. reverse mortgage securitization (MBSL 8/30/99). The $317 million transaction raised the profile of this emerging asset class and paved the way for similar transactions going forward.
"We would like to continue doing more of the [reverse mortgage] business going forward," Harding added.
The investment bank's largest securitization last quarter was the $800 million Freddie Mac T-19 deal, said Harding.
Though Lehman took the prize for year-to-date mortgage-backed debt issuance, Salomon Smith Barney picked up the largest market share for the third quarter itself, with proceeds of $9.9 billion for July through September. For the same time period last year, Salomon came in fifth place.
"I think that in the third quarter , despite very choppy market conditions - in particular, a lot of spread volatility - we saw very good demand for collateralized mortgage obligation product, as for mortgage products in general," said David Langer, a managing director in Salomon's MBS department. "CMO's, I think, shifted from PAC deals with fixed-rate bonds in the front end to more higher-coupon collateral where derivatives execution is what's driving the deals - demand for leverage from some people and floating-rate product from others."
For the third quarter alone, Lehman took the second place spot, with $8.5 billion in proceeds and 39 issues, while Merrill Lynch & Co. grabbed the third spot, with $7.2 billion in proceeds and 14 issues, according to SDC.
Salomon came in second, however, for year-to-date overall MBS issuance, with proceeds of $30.5 billion and 103 issues for the first nine months of 1999. Merrill Lynch took the third spot, with Bear, Stearns & Co. and Credit Suisse First Boston rounding out the top five positions.
Most market participants agree that there will be diminished volume in MBS issuance for the fourth quarter, with most issuers either standing on the sidelines or waiting for an opportune moment to launch their deals.
"Everybody is waiting for the fourth quarter to come and go," said Dan Wallace, a vice president for MBS at Lehman Brothers. "We have three deals coming at the end of the month, but we are not planning any securitizations in November or December. Based on the liquidity situation and the difficulty getting investors to focus on product, we want to be careful."
"Our view is that there will be a slowdown in issuance, but to what degree is hard to tell," added Lehman's Harding. "The whole Y2K thing becomes more of a yawn. But there is a lot of interest rate fears and nervousness out there. It's a catch-22 game, since some people think that maybe they can put some money to work this quarter. But overall, the market will continue to be somewhat soft."
Other observers predict that there will be an increasing demand for liquidity from customers in the year-end.
"I actually expect in the fourth quarter that CMO issuance is going to die down a little bit," said Salomon's Langer. "There will be a demand for liquidity, as opposed to bond tailoring, which entails players giving up a little bit of liquidity."
Right now, sources say that mortgage spreads are on the tight end of the range versus some other spread product, notably commercials. Spreads seem to be tightening in both because the market is trading off, and because all paper, in general, is coming in spread-wise.
"But I think mortgage spreads have done better than other products - better than swaps and better than commercials," Langer added.