Julia-Ambra Verlaine at the Wall Street Journal wrote about a new securitized product that is getting a little bit of attention… (Wall Street Journal)
- “Texas Capital Bank recently sold $275 million of securities to investors looking to cash in on the pandemic-fueled boom in home prices. The bonds are backed by short-term loans the bank makes to mortgage lenders. When those lenders’ borrowers default, the investors in the bonds effectively cover the loss.”
Verlaine explains that banks are now using them to raise capital and otherwise shore up their balance sheets. This process ultimately adds to their lending capacity, which many see as a good thing for financial markets.
So why is this happening? Kaustub Samant, a securities analyst at JPMorgan, says it is all about yield.
- “People want exposure to housing and consumer markets that are performing…Risk transfer securities are one of the few places that give high returns in this environment.”
I know what you are thinking. Securities based on mortgage lending that transfer risk to other investors sound a lot like a credit default swap. That’s a good point and it’s not wrong. So is this 2008 all over again? I’ll be honest, it could be. Mortgage-backed securities and credit default swaps are not what brought down the housing market. What brought down the housing market was severe sub-standard lending practices. If mortgage companies and banks start putting securitization volume above quality loans 2008 will happen again. However, if lending standards remain high (like they are) there is nothing inherently wrong with banks offering a product that reduces their risk on mortgage lending.