US mortgage bonds steady despite foreclosure flap

By Al Yoon

NEW YORK, Oct 12 (BestGrowthStock) – Warnings abound on the impact
of delayed foreclosures on U.S. residential mortgage bonds, but
the investors in the securities have not yet taken heed.

Processing errors now plaguing at least three major firms
that service mortgage loans — including GMAC Mortgage — may
prolong the time it takes to complete foreclosures, raising the
chances for deeper losses to bondholders as taxes and insurance
payments are fronted, investors and analysts said.

Proceeds from foreclosure sales also tend to decline as the
process is dragged out, harming the investors, which run the
gamut from pension and mutual funds to insurance companies.

For now, however, investors are still buying the riskiest
mortgage bonds that were issued by Wall Street firms through
the height of the housing boom.

Yields on so-called private label mortgage-backed
securities, dwindling supply and baked-in expectations for
extended foreclosure timelines have helped preserve valuations
in the market that has ironically proven to be a darling of
fixed-income investors since March 2009.

“Prices are hanging in there in the face of marginally more
selling and foreclosure headlines,” said Jesse Litvak, a
managing director at Jefferies & Co in Stamford, Connecticut.

There are some $154 billion in loans out of the $1.3
trillion private-label bond market affected by foreclosure
suspensions of GMAC, JPMorgan Chase & Co (JPM.N: ) and Bank of
America Corp (BAC.N: ), Amherst Securities Group said in a
research note on Tuesday.

Jeffrey Gundlach, chief executive officer at DoubleLine
Capital in Los Angeles, on a conference call said he has been
assuming recovery rates on mortgage bonds would fall, building
in a loss cushion. Viewing current recovery rates of 53 cents
on the dollar, he buys bonds priced for a 40-cent recovery.

“The foreclosure moratorium is not anything new,” Gundlach
said. “There have been starts and stops with this all through
the credit crisis.”

Amherst calculated that six additional months of delay in
foreclosures would only slightly boost losses to the top-rated
portion of one subprime mortgage bond, resulting in a modeled
drop in price to $91.20 from $92.

The smaller and riskier part of the deal, which would
probably receive no principal but draws interest as long as a
foreclosure is avoided, would rise to 56 cents from 40 cents,
according to Amherst’s experiment.

“Thus far, there has been no effect at all on bond prices,”
said Amherst analysts, led by Laurie Goodman, who still
maintained that foreclosure timelines were a wild card. “We do
expect senior tranches on deals with high delinquencies to
trade at slightly lower valuations.”

On Monday, the Securities Industry and Financial Markets
Association said foreclosure processing mistakes should be
fixed but said dramatic nationwide action could unjustly impose
losses on the investors.

The Obama administration a day later rejected calls for a
nationwide moratorium on housing foreclosures amid fears that
such a move would further hobble the housing market by creating
a backlog of homes that just flood the market later.

Investors are likely to distinguish more than ever bonds by
servicer, and if the loans are in states where foreclosures are
handled by courts, Goodman added.

“We fear this is only the beginning,” Amherst said.

US mortgage bonds steady despite foreclosure flap