JPMorgan Chase Co. (JPM)’s sale of a new
type of mortgage-linked bonds is the best glimpse yet into a
possible future of the $9.4 trillion U.S. home-loan market.
The $47 million of securities raised cash from investors
this week that can be used to offset some of Fannie Mae’s losses
on its mortgage guarantees. The transferring of risk from almost
$1 billion of loans packaged into separate Fannie Mae (FNMA) bonds
resembles a model envisioned by bipartisan legislation passed by
a Senate committee this year and endorsed by the Obama
While government-backed Fannie Mae and Freddie Mac have
sold about $11 billion of their own risk-sharing notes since
introducing them last year, the JPMorgan securities give a
larger role to private capital. Unlike the case with the
mortgage giants’ own offerings, Fannie Mae won’t need to wait
for homeowner defaults to reach a threshold before getting
payments to cover losses, according to Fitch Ratings.
“They’re really taking on only the catastrophic risk,”
Suzanne Mistretta, a senior director at Fitch, said Oct. 29 in a
That’s the model for taxpayers’ backing of the mortgage
market sought in the legislation by Senator Tim Johnson, a
Democrat from South Dakota, and Senator Mike Crapo, an Idaho
Republican. Their bill would replace Fannie Mae and Freddie Mac
with a government reinsurer that would bear losses only after
private capital — potentially insurers or bond investors —
covers the first 10 percent.
Brian Marchiony, a spokesman for New York-based JPMorgan,
and Andrew Wilson, a spokesman for Washington-based Fannie Mae,
declined to comment on the deal. The transaction settled
yesterday, according to data compiled by Bloomberg.
Cash raised from bond investors will be placed into an
account that gets depleted as borrowers default over the first
10 years of their loans, offering Fannie Mae payments equal to
as much as 4.75 percent of the starting balances. Fitch is
assigning BBB- ratings to the safest $19.8 million of the debt.
Those notes carry a floating coupon that pays 2.25
percentage points more than a borrowing benchmark, compared with
4.25 percentage point for rest of the securities, which are
first in line for losses, Bloomberg data show.
In Fannie Mae and Freddie Mac’s own deals, they haven’t
gotten relief on initial defaults, and shared in losses on the
next ones up to the point that bond investors get wiped out.
Investors may not solely bear the losses on individual loan
defaults in both types because they use fixed recovery rates and
the actual costs of foreclosures may be higher.
The JPMorgan offering also may represent a way for banks to
involve the market’s pricing of risk in their loan rates or
profits and negotiations over Fannie Mae guarantee fees, by
having the risk-sharing come sooner and leaving its distribution
in the hands of loan originators.
Another difference is that the new debt doesn’t represent
corporate obligations of Fannie Mae, according to Fitch. Tax
rules have limited the ability of real-estate investment trusts
to invest in the earlier risk-sharing notes.
“Maybe you will see some of the other larger banks”
create the new kind of Fannie Mae-tied securities, “but that
remains to be seen,” Fitch’s Mistretta said.
Wall Street has seen little success in reviving the
traditional market for home-loan bonds without government
backing since the 2008 financial crisis, leaving taxpayer-backed
lending accounting for about 80 percent of new mortgages. Most
of the other loans are jumbo debt too large for the programs
that get retained by banks such as JPMorgan.
Issuance of non-agency mortgage bonds tied to new loans
totals about $6 billion this year, compared with $13.4 billion
last year and as much as $1.2 trillion in each of 2005 and 2006,
Bloomberg data show. JPMorgan issued more than $1.7 billion of
the securities this year.
To contact the reporter on this story:
Jody Shenn in New York at
To contact the editors responsible for this story:
Shannon D. Harrington at