A trend of fewer homeowners refinancing their mortgages as interest rates climb is helping to curb sales of home-loan bonds without government backing. It’s also making new notes being issued safer, according to Moody’s Investors Service.

Mortgages used to buy homes historically default less than replacement loans, partly because of the greater vigor employed by lenders in underwriting the first category of debt, the ratings firm said in Feb. 19 a report. The dynamic is beneficial for investors as higher rates reduce how many consumers can benefit by refinancing, boosting the share of purchase loans in pools backing nonagency bonds.

“It’s a very clear trend we’ve seen,” said Kruti Muni, an analyst at Moody’s who worked on the report, which addressed the quality of securities tied to “jumbo” mortgages, the only type now being packaged into nonagency bonds.

A slowing of the Federal Reserve’s debt buying and an improving economy has driven the average rate on typical 30-year mortgages to 4.5% from a record low 3.47% in December 2012, according to Mortgage Bankers Association data. A slump in new loan volumes caused by the drop in refinancing is curbing nonagency issuance, along with banks’ demand for loans for their balance sheets and bond investors’ desire for higher yields after record defaults.

Fewer refinance mortgages should be a “credit positive” for new jumbo-mortgage bonds, according to Moody’s. The average share of purchase loans in deals by Redwood Trust , the most active issuer since the market restarted in 2010, rose to 54% in the second half of 2013, from 26% in the previous six months, according to the report.

While purchase mortgages are generally given to borrowers with higher credit scores, that doesn’t fully explain their better historical performance, Moody’s said. Lenders also “have typically subjected purchase obligors to more stringent credit reviews and property valuations since purchase borrowers have no history of residing in the home,” the firm said in its report.
Mezz Spreads to Drive CLO Refis

U.S. collateralized loan obligations are likely to see their reinvestment periods extended this year as deals roll into new transactions after being called in full, according to Barclays.

Typically, holders of the junior most CLO securities, known as the “equity” holders, have the right to call a deal after two years and will do so by essentially repricing the deal if debt financing levels are more favorable than when the deal originally priced.

The impetus for calling CLOs normally comes from spread tightening on the senior, triple-A rated tranches. These are the largest tranches of deals, typically representing 60% of the capital structure, and in some cases they are the only class that can be called.

And while many deals issued in 2012 are approaching the end of their non-call periods, spreads on the triple-A tranches of newly priced deals are essentially unchanged from 2012 levels.

Instead, the incentive comes from spread compression on mezzanine tranches, both the triple-B and double-Bs.  Spreads on the mezzanine tranches of new deals are 100 basis points tighter, on average, than they were in 2012.

As a result, the weighted average cost of liabilities is almost 15 basis points lower. This could lead many more deals to be called than when looking at triple-A spreads alone, according to Barclays.

“The market implication when deals are called in full is that their reinvestment periods are likely to be extended if they are rolled into a new transaction,” analysts stated in a Feb. 21 report. “This should be a slight positive for the market, since one-quarter of the 2012 deals had a reinvestment period of only three years, whereas 2013 and 2014 deals have extended that period to at least four years.” However, if only the mezzanine notes were re-priced, the effect would be more muted.

Ocwen Sells Notes Tied to Servicing Fees

Ocwen Financial has found a new way to fund its rapid expansion in mortgage servicing: issuing notes tied to the fees that it earns from managing government-backed loans.

The $123.5 million of notes do not amortize, making only interest payments for 14 years. Monthly payments will be calculated as 0.21% of the principal balance of a pool of mortgages, according to a person familiar with the transaction. The initial balance is approximately $11.8 billion. So if some of the mortgages are paid off, reducing the servicing fees Ocwen earns, investors will receive a commensurately smaller amount of interest.
Based upon expected prepayments the cash flows from interest payments would produce a 10% yield.

Barclays and Morgan Stanley are joint leads.

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