Earlier this year, during an industry conference, representatives of Wilshire Credit Corp. were said to be scouting for capital partners willing to purchase whole loans, while giving it the servicing rights.
Owned by Merrill Lynch, Wilshire Capital would have access to the types of mortgages that sources say are being offered up for sale on a whole loan basis. More to the point, according to market sources, it illustrates the resurgence of whole loan sales in the capital markets.
"Since the securitization market is broken, there is more room to buy whole loans effectively," a market source at a hedge fund said. "A lot of people are looking at this opportunity."
In particular, market sources said that traditional institutional investors, namely insurance companies, have been approached by bulge bracket firms and their representatives to complete these types of deals. Apparently, many of the negotiations involve the purchase of commercial mortgages, but market sources included the possibility of deals involving residential mortgages, too.
Wilshire Credit refuted word about plans for its whole loan portfolio, but more than a couple of market sources concurred that the company was among the number of hopeful sellers of whole loans to insurance companies and similar institutional investors.
"If you buy these loans, you have to have a servicer," said one market source. "We're not in the place to do it, but we continue to explore the opportunity."
A whole loan sale to an insurance company might provide a quick boost to those holding the paper, but that does not represent a liquidity event by any means, said one head of a fixed-income desk for a broker dealer.
"It's a function of conduits not being able to do securitizations," he said. "These purchases being made are underwritings themselves."
The setup is not exactly a boon for insurance companies either, especially for those that have bought securitized mortgages with regular credit support, said one market source. Currently, it is possible to buy a triple-A-rated CMBS deal with super senior/subordination levels of 30% and that achieve spreads to swaps of 300 to 400 basis points. Any whole loan purchase would have to exceed that benchmark level, said that source, adding that his company would not want to move into residential collateral for yields that are significantly less than that.
"If you buy the loans, you are taking the first-loss position," a market source with knowledge of a potential deal said. "We need yields that are beyond what the market would offer there."
Still, market sources say more liquidity is trickling into the whole loan market, and they point to several recent acquisitions as examples of the development.
Although Wilbur Ross is not a traditional institutional investor, its recently announced $1.1 billion purchase of Option One, H&R Block's mortgage servicing unit, puts a spotlight on the whole loan market. Option One currently services about $53 billion in subprime mortgages.
Another development might be differentiation among servicing companies. Goldman Sachs' purchase of Litton Loan Servicing late last year is one example, a hedge fund source said.
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