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JPMorgan Chase Prepares $1.9 Billion MBS Deal

piggybank-cashJPMorgan Chase & Co. [1], is preparing to sell a group of mortgage-backed securities worth nearly $2 billion, the company confirmed to MReport Wednesday morning.

This credit risk transfer is expected to reduce the risk borne by U.S. taxpayers and bring more private capital back into the mortgage market. In addition, this transaction will help restore private-sector securitization, a necessary component of the broader recovery of the housing system in the U.S.

According to Wall Street Journal [2] writer, Emily Glazer, the bank is expected to price the residential mortgage-backed  securities deal over the next two weeks. JPMorgan Chase would hold 90 percent of the deal by holding the safest parts and selling off the riskier pieces to investors, she wrote.

"The new deal is JPMorgan's first "house transaction" since the financial crisis, meaning it is entirely backed by mortgages the bank owns," Glazer said. "The pool includes a mix of more than 6,000 mortgages, both newer and refinancings, around 75 percent of them conforming with the underwriting standards set by Fannie and Freddie."

A poll released by U.S. Mortgage Insurers [3] (USMI) found that the majority of Americans believe that the government is not doing enough to prevent another taxpayer-funded bailout of Fannie Mae and Freddie Mac, and also that the private sector should bear most of the risk on mortgage loans that default.

Respondents in USMI’s survey expressed similar sentiments. Almost half of the survey’s respondents, 49 percent, stated that they believe that the government is not doing enough to reduce the risk of a taxpayer-funded bailout of the two GSEs. Likewise, a majority of the respondents (48 percent) believe that the private sector should bear the risk for the responsibility on mortgage loans that go bad. Nineteen percent said that borrowers should shoulder the losses, and 12 percent said it should be the government.

More than half the survey’s respondents (54 percent) said they would support legislation requiring more private capital, such as additional mortgage insurance, that would reduce the losses taxpayers would absorb should mortgage loans default.

Despite these survey results, Fannie Mae and Freddie Mac do appear to be making an effort to perform credit risk sharing transactions with private investors.

Fannie Mae [4] has priced its latest credit risk sharing transaction [5] in the Connecticut Avenue Securities (CAS) at $945.1 million, according to an announcement from Fannie Mae.

“Fannie Mae continues to focus on the long term strength and stability of our Connecticut Avenue Securities program,” said Laurel Davis, VP of credit risk transfer, Fannie Mae. “We continue to work to build a deeper market for credit risk and are pleased with investor participation in the program. We’ve built a robust set of credit risk management tools that benefit Fannie Mae and the investors in our credit risk transfers. Fannie Mae will continue to innovate in the credit risk management space so that we can build a better housing finance system for the future.”

Freddie Mac [6] launched a new asset class with the beginning of the Structured Agency Credit Risk (STACR [7]) series in July 2013 as a strategy for selling credit risk on single-family mortgages to private investors.

“By shifting more of our potential credit losses to private investors, we've led the way in transforming how a significant portion of the U.S. housing market is funded,” said Kevin Palmer, SVP of Credit Risk Transfer (CRT), in a commentary on Freddie Mac’s website [8]. “This further protects U.S. taxpayers from backstopping GSE credit losses and helps to build a more robust system that can keep overall mortgage rates low, while creating a more sustainable mortgage funding model.”