Magazine article American Banker

Time Bomb for Industry in High-Leverage Issues?

Magazine article American Banker

Time Bomb for Industry in High-Leverage Issues?

Article excerpt

Wall Street is embracing highly leveraged mortgages as one of the year's hottest products. But just how safe are these offerings for investors?

Though no major problems have occurred yet, buyers should certainly go in with their eyes open to the hazards, industry analysts say.

"If someone is doing something they shouldn't be doing or they don't know what they're doing, there could be problems," said Michele J. Loesch, the analyst at Fitch Investors Service who tracks issues backed by highly leveraged, or low-equity, mortgages.

The warning comes at a crucial time for the mortgage securities market. A boom in highly leveraged issues stands to make the entire market for mortgage securities more liquid - and therefore more enticing to investors. But an influx of shoddy products could derail strides the industry has made to restore its luster after mortgage securities tanked two years ago.

Mortgage bankers create high-leverage loans by allowing customers to borrow up to 125% of their home's value. Lenders don't want to carry these obligations on their books, so they turn to Wall Street to package the loans into securities.

The business of turning highly leveraged loans into bonds really took off this year, with issuance expected to balloon to $3.5 billion, from $200 million in 1995. Volume could exceed $7 billion next year, according to some industry estimates.

The fear is that poor underwritting - during origination or securitization - could cause the issues to "blow up," in Wall Street parlance.

The risk to principal is substantially reduced by insurance that highly leveraged mortgage bonds are required to carry, credit analysts say. …

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