Interest in both new production and legacy loans has been growing for some time, but without a capital markets outlet like securitization, some careful matchmaking will continue to be needed to meet the growing demand.
"Lack of securitization in a lot of ways has led to a lack of liquidity, therefore there needs to be more attention to matching specific buyers with specific sellers," said Brent Giese, a managing director and one of two former Bear Stearns executives co-heading a new residential/commercial whole loan initiative at Janney Montgomery Scott LLC.
"There is a very obvious increase in the amount of loan activity from the need to address legacy issues as well as a need to promote new loan programs in a challenging mortgage market," he said. "There is a lot of raised capital for the legacy positions and a lot of money earmarked for new production loans as well."
Spreads have tightened over the last several months and market participants have been banking pools of capital to address loan sectors, said Giese.
"It's really a two-way flow," he said. "There are many banks out there looking to buy...new production" so long as it is "clean paper."
Despite this interest, "there are ongoing issues with new production since securitization continues to be not as prevalent as it once was," Giese said. "Without securitization, there needs to be a focus on [placing] new loans."
Because securitization that would allow for greater participation of accounts in the market is missing, it is "more crucial for originators to get a firm takeout on the back of a trade," he said, noting that the company will work with originators as well as institutional investors such as banks, insurers and money managers "to try to fill those mandates."
This can result in a situation where there is a relative amount of inaction in the market because of what Giese likens to a "which came first, the chicken or the egg?" situation.
"You can't go out aggressively on a product unless you have a takeout," he said.
As a result, the lack of securitization "has led to a lot of niche buying of product," Giese said. So today there are "certain buyers earmarked for specific mandates" and among the roles his firm will play in this process is to make matches between those mandates and sellers' product. "It could be legacy positions or it could be new production concerns," he said.
Janney Montgomery Scott has been active in the securities business and the new whole loan effort will be able to leverage off that as well as other comprehensive financial services the company offers, Giese said.
For example, banks' need to raise capital is often interconnected with their lending or loan buying, so if Janney Montgomery Scott is already helping with the former the whole loan unit's help with the latter rounds out the business relationship.
"One situation may lead to the other and we're in the position to do both," Giese said.
"It's one of the things that attracted me to the platform. It's a comprehensive approach. We have balance sheet strategies to help some of these banks work through these issues."
Regional, medium-size and community financial institutions are Janney Montgomery Scott's core strength but it does or can serve other types of institutional investors as well.
The company will be looking to hire mortgage salespeople, among others, going forward, Giese said.