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Global Investors Gobble Up Mortgage-Backed Securities

Posted By Barry Ritholtz On August 25, 2005 @ 7:45 am In Financial Press,Real Estate | Comments Disabled

Front page story in yesterday’s WSJ, titled "
Housing-Bubble Talk Doesn’t Scare Off Foreigners
."

Funny thing is, foreigners are notorious for their bad timing in buying both equities and real estate in the U.S.

Examples:  Rockefeller Center purchased by the Japanese at the top of the 1980s Real Estate run; Foreigners dumped U.S. equities in the summer of 2002, after piling into them in 1999.

Here’s a chart, along with our Ubiq-cerpt:™

Wsj_08232005224858WSJ [1]:  "U.S. lenders will make about $2.8 trillion in home-mortgage loans this year, according to the Mortgage Bankers Association. The MBA estimates that about 80% of these loans will end up in mortgage-backed securities. Mortgage-backed securities outstanding at the end of the first quarter totaled $4.61 trillion, up 61% since the end of 2000. In the same period, total Treasury securities outstanding grew 35% to $4.54 trillion.

Investors’ strong demand for mortgage debt, besides allowing lenders to offer many borrowers better terms, has also made it easier to offer mortgages to borrowers who might not easily qualify for a loan. The growth of the mortgage markets spreads the risks around. But some mortgage-industry analysts say lenders have become less stringent in their loan terms because they can sell almost any type of loan to those who package mortgage securities for investors.

"Loose lending standards are probably the single biggest thing fueling the speculative fever we have today" in housing, says Kenneth Rosen, an economist who is chairman of the Fisher Center for Real Estate at the University of California at Berkeley.

In a world of low interest rates, the market for mortgage securities is simply too big and profitable for many investors to ignore. Investors can earn about 5.5% on mortgage securities whose payments are guaranteed by Fannie Mae or Freddie Mac, government-sponsored companies. Those who can stomach greater risk can buy subprime mortgage securities, which come with no guarantee but can yield as much as 15%, according to Bear Stearns. By contrast, 10-year U.S. Treasurys yield about 4.2%; the equivalent government securities in Germany yield about 3.2% and in Japan 1.5%.

The buyers of mortgage-backed securities include U.S. pension funds, hedge funds and insurance companies. But overseas investors are the fastest-growing source of demand. The trade publication Inside MBS & ABS estimates that foreigners held $280 billion of U.S. mortgage securities at the end of 2004, or 6% of the total outstanding. The foreigners’ holdings rose 26% last year and have continued to bound ahead so far this year, Inside MBS & ABS says.

"There’s this insatiable appetite for mortgage-backed securities world-wide," says Andrew Sciandra, a senior vice president at IndyMac Bancorp, a California thrift, who heads a team that creates those securities. In the past year, Mr. Sciandra has met with investors from places like Germany, France and Abu Dhabi. Asian investors now account for roughly 10% to 20% of mortgage securities sold by IndyMac"

>

Pretty intriguing stuff . . . I wonder if history will be repeating itself.

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Source:

Housing-Bubble Talk Doesn’t Scare Off Foreigners

Global Investors Gobble Up Mortgage-Backed Securities,
Keeping Prices Strong
RUTH SIMON, JAMES R. HAGERTY and JAMES T. AREDDY
THE WALL STREET JOURNAL, August 24, 2005; Page A1

http://online.wsj.com/article/0,,SB112484869024321472,00.html


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