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Citigroup, Credit Suisse Re-Enter Risky Home Loans Market

Zacks Equity Research

Citigroup C and Credit Suisse CS have re-entered the risky mortgage loans market or non-qualified mortgage, wherein they provide new home loans to borrowers with poor credit scores. The move followed two other Wall Street biggies, JPMorgan Chase JPM and Wells Fargo WFC, both of which made a comeback with ‘private-label’ bonds in late-2018.

Citi’s first comeback deal involves $362.58 million worth of loans originated by Impac Mortgage Holdings. Per DBRS, a credit reporting agency, the company is acquiring non-QM loans from lenders with an aim to re-sell in the secondary market.

Also, Credit Suisse is mulling to sell $355.8 million of non-QM bonds of mostly adjustable-rate mortgages on homes predominantly in California, per Kroll Bond Rating Agency. Though the agency assigned Triple A ratings to the company’s bond, it fears that adjustable-rate loans can “result in payment shock”.

Non-QM loans can be related with the large number of subprime loans that were responsible for the 2008 financial crises. However, per Mike Fratantoni, chief economist with the Mortgage Bankers Association, these non-QM loans are not like the Alt-A/subprime loans that were distributed prior to the housing crash.

Also, these so-called private-label securitizations are considered to be a growing part of the current mortgage market. Under this label, a lender packs together hundreds of income-producing assets and then breaks them to sell in pieces to investors who want fixed income.

These bonds come without the backing of Fannie Mae and Freddie Mac, and formed only 4.2% of the total mortgage debt market as of July-end, per an article by MarketWatch.

Issuance of non-QM loans picked pace in 2015 and now with the attention of major U.S. banks, its supply is expected to reach $21 billion in 2019. However, it is still early to worry about the markets as market volume remains significantly below the level in pre-crisis years.

All the aforementioned stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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