Two more funds started to exit the Public-Private Investment Program in the third quarter of 2012. Returns from the program – which largely focuses on investing in vintage non-agency mortgage-backed securities – remain strong and the Public-Private Investment Funds can manage their holdings for at least the next five years, but four of the original nine PPIFs have now exited the PPIP. In July, RLJ Western terminated its PPIF’s investment period four months ahead of schedule. The notification occurred shortly after ...

Prices on vintage non-agency mortgage-backed securities have increased significantly in the past three months and are expected to remain elevated. The strong returns are being driven by improvements in home prices and loan performance along with decreased supply. “The numerous positive developments in the non-agency space should continue to benefit the non-agency market in the fourth quarter,” said analysts at Bank of America Merrill Lynch. “We see the sector as fundamentally undervalued at current levels.” ...

No matter how bad mortgage market watchers believe this week’s headline-grabbing lawsuit against Morgan Stanley by the American Civil Liberties Union is, it could be much, much worse for a swath of new potential defendants throughout the securitization pipeline and for the industry as a whole, according to one legal expert. The ACLU headed a group that filed suit in the U.S. District Court in New York on behalf of five Detroit residents. The lawsuit claims that Morgan Stanley pushed a unit of now-bankrupt New Century Financial Corp. to target minority borrowers for high-risk subprime mortgages. Between 2004 and 2007, Morgan Stanley “ramped up”...

Current efforts by numerous firms to establish a non-agency market for real estate owned rental securitizations are worthwhile, based on investor interest in the emerging sector. Investors are skeptical of REO rental assets but also willing to participate in the market, even without AAA ratings. “We look forward to being part of the discussions with issuers, investors and operators,” Youriy Koudinov, a director at TIAA-CREF, said this week during a seminar hosted by the American Securitization Forum. “As prudent ...

Investors in vintage non-agency MBS have seen strong returns in recent months, particularly in August. Industry analysts suggest that returns are likely to remain elevated as there are few remaining risks for non-agency MBS and supply is limited. “Despite increased profit taking on this year’s impressive performance, bonds continue to trade well,” according to analysts at Bank of America Merrill Lynch. “While demand for non-agency bonds will likely grow as home prices recover, it will not be met with more new supply as is seen in the broader high-yield bond universe. This is a very strong backdrop for further price appreciation.” From the beginning of June through the end of September, pricing on the ABX index that tracks subprime MBS has...

Interest shortfalls on non-agency MBS have increased significantly in the past five months, according to research by Morningstar Credit Ratings. The servicing-related issue causes investors to absorb unpredictable losses and could result in downgrades of non-agency MBS. A sample of 2,858 non-agency MBS deals (21,727 tranches) examined by Morningstar in May and again in August showed a 38.0 percent increase in the number of deals with interest shortfalls. Some 18.6 percent of non-agency MBS deals examined by Morningstar for the August remittance period experienced a shortfall in at least one tranche. Shortfalls increased overall even though 21.8 percent of the shortfalls seen in March had...

First-lien mortgages held in bank and thrift portfolios increased by 4.1 percent at the end of the second quarter of 2012 compared with the same period in 2011, according to an Inside Nonconforming Markets analysis of bank call report data. The strong increase comes as banks actively sell poorly performing legacy mortgages and suggests that lenders have increased their non-agency portfolio originations. Of the 21 banks and thrifts with at least $10.0 billion in first-lien holdings as of the ... [Includes one data chart]

Wells Fargo and Morgan Stanley last week received notices from non-agency mortgage-backed security investors represented by the law firm of Gibbs & Bruns, which helped negotiate the pending $8.5 billion non-agency MBS settlement with Bank of America. Industry analysts suggest that the notices of non-performance could prompt settlements from Wells and Morgan Stanley, though the circumstances differ from the BofA case. The notices identify covenants in pooling and servicing agreements that the servicers ...

Thomas Hoenig, a director at the Federal Deposit Insurance Corp., last week called for changes to impending Basel III capital standards. Industry analysts have warned that the rules will discourage origination of nontraditional mortgages. “In private discussions I find a good deal of uneasiness about Basel III’s ability to be more effective than previous Basel efforts; however, there is a sense that we cannot go back,” Hoenig said in a speech. “I suggest that we not only can go back, we must.” ...

The major servicers handling non-agency mortgages under the Home Affordable Modification Program have made significant improvements, according to new assessments released by the Treasury Department. None of the nine largest non-agency HAMP servicers were in danger of having incentive payments withheld as of the end of the second quarter of 2012. “Servicers continue to focus attention on areas identified in previous program reviews and, as a result, are demonstrating considerable improvement in ...