Is the appetite for risk returning?

by Donald Horne10 Dec 2015
Seven years after the housing bubble collapsed, Wall Street’s appetite for riskier mortgages is returning.

Billionaire John Grayken’s Lone Star Funds recently issued a small batch of residential mortgage-backed securities tied to borrowers with weak credit, the second known private offering of its kind to be sold since 2008.

The deal, called COLT 2015-1 and managed by Credit Suisse Group AG, yielded investors as much as 6.4%, according to data compiled by Bloomberg. The mortgages were originated by Caliber Home Loans Inc., a Lone Star unit.

The appetite for risk has been building, with the government’s own FHA loans coming under fire.
One CEO – Kevin Watters of Chase Mortgage Banking – has taken aim at loans designed for first-time buyers as being akin to the subprime loans that led to the housing crisis in 2008.

FHA requirements are down to a 520 FICO (credit score) and you only have to put 3.5% down,” he told CNBC. “That’s subprime lending, and we’re not in the subprime lending business.”

It follows a similar offering completed by Lone Star in August, which was viewed at the time as a post-crisis milestone, signaling a re-opening of bond markets for non-prime mortgages. Since the U.S. housing crisis, Wall Street’s mortgage-securities issuance has been limited to bundling old, soured debt or big loans made to the wealthiest Americans. 

Wall Street is trying to avoid the kinds of mistakes that contributed to the 2008 financial crisis. Lone Star, for example, retains a riskier portion of the new bonds as a gesture of faith that the securities will perform. The industry has also made efforts, mandated by various new laws, to improve underwriting practices.

Jed Repko, a Lone Star spokesman at J. Frank Associates, didn’t return telephone and e-mail messages seeking comment. Credit Suisse spokesman Drew Benson declined to comment, as did Angel Oak spokesman Freddy Martino at Gregory FCA. Nomura spokesman Jonathan Hodgkinson declined to comment.


Should CFPB have more supervision over credit agencies?