A red-hot housing market is enabling banks to sell a new kind of bond that shares the risk of mortgage and loan defaults with institutional investors.
Texas Capital Bank recently sold $275 million of securities to investors looking to cash in on the pandemic-fueled boom in home prices. The bonds are backed by short-term loans the bank makes to mortgage lenders. When those lenders’ borrowers default, the investors in the bonds effectively cover the loss.
The transfers are a product of the effort to shield Fannie Mae and Freddie Mac from the risk of a mortgage-market reversal. Banks are now using them to raise capital and otherwise shore up their balance sheets, a process that ultimately adds to their lending capacity, analysts said.
Banks including JPMorgan Chase & Co. and Citigroup Inc. have recently increased sales of risk-transfer securities tied to mortgages, auto loans and corporate debt. However, the entry of regional banks marks a new phase in the market’s expansion, said Simon Boughey, an analyst at Structured Credit Investor.
“The addition of Texas Capital Bank to the roster in March this year shows there is potential for this mechanism to grow,” said Mr. Boughey.