Central Banks

Friday, January 13, 2012 - 13:13

US MORTGAGE MEMO: Non-Agencies Face Supply From Maiden Lane


NEW YORK, Jan 13 (MNI) - Prices of asset-backed securities got hit down late Thursday on news that a bid list consisting of non-agency residential mortgage-backed securities from the Federal Reserve's Maiden Lane I portfolio was circulating in the market.

Market sources confirmed there was a $7 billion bid-wanted-in-competition list being circulated by BlackRock Solutions, the New York Fed's investment manager, and that the bids are due next Thursday.

They also confirmed the BWIC was spurred by a reverse inquiry from a large primary dealer bank who made a bid to the New York Fed for the $7 billion in non-agency securities.

Readers should recall that back in March 2011 the NY Fed announced it would begin selling Maiden Lane II assets that it acquired in its first loan to AIG Group in 2008 via the BWIC process. The Maiden Lane II portfolio consists mostly of non-agency suprime and Alt-A Adjustable rate mortgages or ARMs.

The Fed was successful in selling about $9.4 billion in face value from that portfolio in nine separate auctions from April to early June 2011.

But the Fed's investment manager, BlackRock Solutions, was forced to halt these sales, however, as the supply finally overwhelmed the Street and prices faltered. The sales started out being a help to the non-agency sector because it created price discovery but they ended up becoming a hindrance.

It is important to remember that next week's sale is the direct cause of a reverse inquiry and dealers should therefore not assume that the Fed has resumed regular sales from Maiden Lane II.

The Fed has stated all along that "Over time, the Federal Reserve will also entertain investor inquiries to acquire specific parcels of securities where these offer superior value, though no such bid will be accepted without being put into competition with other interested investors. In such cases, investors may submit offers for parcels of securities directly (without necessarily going through a dealer."

It is unclear what kind of reception next week's list will receive because market sources note that it is being circulated on an AON basis meaning bidders must bid for "all or none" of those securities. This will clearly cut down on the type of bidder in the process.

Adam Murphy, President of Empirasign, said the AON restriction should be lifted.

"It reduces the average execution price because it limits the number of buyers," he says.

He also says it will restrict the number of buyers to only the big players.

That is bad from the standpoint of transparency and price discovery, and hence, is also bad for the taxpayer, Murphy adds.

It also means that the larger bidders, who would not blink at the size of the list, are also taking advantage of the AON restriction. In other words, the competition is reduced and it might create an opportunity to pick up a large chunk of paper at too cheap a price.

"Bottom line," one market expert said, "it is not good for the market because it lowers the execution price."

But market sources also believe that if the bid is too cheap, the paper will not trade as it has been clear all along that the NY Fed is not a forced seller of any of this paper.

On the other hand, if the prices received are good, it could spur selling from other accounts.

Market sources note that European banks are sitting on about $45 billion of similar non-agency paper. Given the woes of the European banks in the current crisis they would likely relish the idea of liquidating some paper if the price was right.

There was also a $3.8 billion BWIC of agency reverse interest only (MTA I/Os) circulating from BlackRock on Friday. This is also the result of a reverse inquiry, sources said. This is paper that is owned in the Fed's Maiden Lane I portfolio and consists of securities obtained in the JP Morgan/Bear Stearns shotgun marriage of 2008.

But market sources remind that sales from the Maiden Lane I portfolio have been taking place on and off for some time and that this is nothing new. It just happened to coincide with the reverse inquiry to the Maiden Lane II portfolio, a less frequent occurrence.

Another market expert concurs saying the Maiden Lane I portfolio has been far more active since its inception in 2008.

"It has been more proactive," he said, "and while it has been a net seller it looks like there has been some reinvestment taking place along the way."

** Market News International New York Newsroom: 212-669-6430 **

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