UPDATE 1-NY Fed plans pair of Maiden Lane sales next week

(Adds details, background)

By Al Yoon

NEW YORK, April 8 (Reuters) – The Federal Reserve Bank of
New York is planning two auctions of risky mortgage-backed
securities from its Maiden Lane II portfolio next week, the
bank’s website indicated on Friday.

The sales would be the Fed’s second and third from the
portfolio that was created during the depths of the financial
crisis to absorb the troubled “private-label” mortgage bonds
from AIG (AIG.N: Quote, Profile, Research) and help prevent the collapse of what was the
world’s largest insurer.

The auctions are gripping U.S. markets, as they represent a
rare opportunity to purchase the high-yielding securities in
bulk and could give some transparency to the $1.3 trillion
market, where value is tough to discern. The descriptions and
sizes of bonds for the next sales on April 13 and April 14 will
be announced on Monday.

AIG last month offered $15.7 billion for the entire
portfolio, but the Fed last week said the public interest in
maximizing returns and maintaining market stability would be
better served by selling the assets competitively. The face
amount before this week’s sale topped $30 billion.

The initial auction met with stronger-than-expected demand,
according to some dealers and investors. About $1.3 billion out
of $1.5 billion face amount traded in that sale.

“The Fed has to be pleased with the results,” Richard King,
chief executive officer of Invesco Mortgage Capital (IVR.N: Quote, Profile, Research),
which buys residential mortgage-backed securities, said on
Thursday.

“It’s just technically very-well bid,” he said of the
market for private-label RMBS, where investors clamor for yield
and a lack of new issuance means supply is shrinking.

Still, there is disagreement on value in the securities,
whose underlying loans are tainted by delinquencies and losses
due to lengthy foreclosure proceedings. The bonds, created by
Wall Street investment banks, were a cause for the lending
excesses that caused the U.S. housing bubble.

Some prices received by the Fed in this week’s auction were
far above secondary pricing levels, according to one trader.
That suggests the the bids were inflated to curry favor with
the Fed or support positions of dealers that had taken on large
portfolios in recent weeks.

The securities had shown some signs of softening after
rallying 50 percent or more over the past two years.

RMBS backed by prime 30-year fixed-rate jumbo loans
declined to about 93 cents on the dollar last month from 95
cents in February and 97 cents in January, according to Amherst
Securities Group data. Prices on the riskier bonds backed by
payment-option adjustable-rate mortgages and subprime mortgages
also declined slightly, the data showed.
(Editing by Dan Grebler)

UPDATE 1-NY Fed plans pair of Maiden Lane sales next week