Monday, August 13, 2012

Non-agency mortgage bond market continues to collapse

The non-agency mortgage bond market continues to collapse with UBS being the latest to exit.

Regular readers know the market is destined to extinction if it doesn't address the issue of opacity.  Since current information on the underlying collateral performance is unavailable, no one can value these securities.  As a result there are few, if any, buyers.

In addition, there are a number of sellers as bank capital requirements give the banks a reason to reduce their holdings of these securities.

As reported by the Wall Street Journal,

UBS AG (UBS, UBSN.VX) has stopped trading in subprime and other riskier residential mortgage-backed securities in its latest effort to ease capital needs under new international banking regulations.... 
It doesn't affect the Swiss bank's plan to participate in new RMBS issuance, even as that market has yet to see any significant volume since the financial crisis.
Reflecting the ongoing buyer's strike.
Banks are preparing for new bank standards known as Basel III that require costly increases in capital for holdings of risky securities. Non-agency RMBS are among those that would take more capital because most are rated below investment grade, and their idiosyncratic nature means broker-dealers most often have to hold the assets in inventory as they seek out buyers. 
Until there is observable event based reporting on the underlying collateral, investors cannot know what they are buying.   Since capital requirements are related to knowing what you own, it is not surprising that banks have to hold more capital against opaque non-agency RMBS.
The non-agency RMBS market is about $1.1 trillion but shrinking as new issuance has been virtually nil.

No comments: