The use of facilities which issue mortgage-backed commercial paper (MBCP) as a unique funding source is expected to grow this year, exemplified by last week's privately placed offering for Principal Residential Mortgage Inc. Many lenders are looking to set up their own vehicles in the near future, sources say.
Lehman Brothers was in the process of pricing $549 million of residential mortgage warehouse receivables-backed term notes in a private placement for Principal last Wednesday, simultaneously increasing availability on the company's revolving borrowing facility to $2.5 billion.
By issuing its own off-balance-sheet short-term MBCP, the facility gives mortgage lenders the opportunity to finance lending activities without having to rely on outside multi-seller conduits for short-term borrowing.
Also as part of the same offering, Principal increased the availability of extendable commercial paper - dubbed secured liquidity notes - by $450.7 million for a total credit line of $2.5 billion, similar to any commercial paper program.
The only other lenders who have similar programs in place are diversified lender Cendant Corp. and homebuilder Centex Corp., which has a program for both conforming prime and home equity loans. The Cendant issuance vehicle is named Bishop's Gate Residential Mortgage.
A company source at the Des Moines, Iowa-based Principal Residential Mortgage speaks highly of the program, citing the ability to issue triple-A rated securities despite no unsecured debt rating from a major rating agency. "Principal is not as highly rated as the securities PRM Capital Residential Mortgage can issue through this vehicle," he added.
Principal can tap funds via the program, with the liquidity notes backed by mortgages said to be in a "gestation repo" state, in the pool for an average of 15 days before being replaced with newly originated mortgages. Proceeds then go to funding additional mortgage origination activity, traditionally funded via short-term borrowing or debt issuance, such as medium-term notes.
Essentially, this funding method is used to bridge the gap in time between origination of a new mortgage and when the loans are either sold to government-sponsored entities or securitized in the term markets.
It was added that mortgage lenders affiliated with highly-rated commercial banking parent companies can access the capital markets at tighter spreads than an independent counterpart, in addition to the increased access to funding in conduits.
The major benefits of this program are the flexibility offered to issuers by not having to rely on major banks for short-term funding and the more volatile cost of funding for these lenders in times of economic uncertainty, such as the credit crunch of 1998, which led to the development of these programs in the first place.
Although banker sources could not confirm any specific names as future issuers, some in the market speculated that any mortgage lender not related to a commercial banking entity, such as Countrywide Home Loans Inc., would benefit from the reduced reliance on bank conduits. "If an issuer like Countrywide were to set up a vehicle like this, it would really get people's attention," one market source said.
