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Pimco Tries Hand as Mortgage-Bond Issuer
Asset Backed Alert, Harrison Scott Publications Inc. (May 7, 2010)

Pimco is building a team that would buy and securitize private-label mortgage portfolios.

The group is forming under Dan Ivascyn, a portfolio manager who focuses on asset-backed securities at the Newport Beach, Calif., investment giant. The plan is to sell bonds that would fund purchases of both newly originated loans and seasoned whole-loan pools. Outside investment banks would handle marketing and distribution of the securities.

The initiative in many ways resembles mortgage-securitization programs maintained by investment banks. While those efforts have broadly fallen out of favor amid the global financial crisis, a number of asset managers have been considering similar moves. Pimco's appears to be the farthest along.

An executive at another big investment shop - one of the eight running mortgage-bond funds under the U.S. Treasury Department's Public-Private Investment Program - said his firm has been considering the creation of a home-loan securitization program since January. However, it hasn't decided to pull the trigger yet. "There's a lot of other people out there with the same thought process," said William David Tobin, principal at whole-loan trading outfit Mission Capital in New York.

One factor preventing some firms from moving forward is a lack of investor demand for fresh mortgage bonds. But recent deals from American General and Redwood Trust have some convinced that there's enough buyside interest to support economical funding costs, or that there soon will be.

The $211.2 million Redwood Trust issue, backed by jumbo loans from Citigroup, saw a three-year class of triple-A-rated securities sell for 375 bp over Libor.

Citi has since said it would cut interest rates for new jumbo-loan borrowers while increasing its lending volume, adding that its credits could back another securitization within six months. Meanwhile, demand from borrowers has been recovering after falling off with the housing-market crash - and other lenders are only waiting for a revival of the securitization sector to supply the liquidity needed for them to boost their mortgage production as well.

That's where Pimco comes in. Its loan-buying program would create an outlet for those credits, in turn giving mortgage shops more cash to continue lending. Since institutions like Citi have multiple ways to line up their own financing, the effort might prove most useful to smaller originators that want to ramp up their loan volume.

In those cases, Pimco would probably take a lesson from the market downturn by focusing on the strongest accounts. "This model might have the ability to replace the investment banks who used to do this . . . I would imagine that since these large asset managers would need to provide financing, they would wisely be selective about which loans they'll permit to be originated," said Elton Wells, who heads the structured-product desk at illiquid-asset exchange SecondMarket.

Pimco also sees arbitrage opportunities on the secondary mortgage market. That is, discounted prices on loan portfolios would allow it to rake in gains exceeding its securitization costs. Some of the collateral could come from securitizations completed 5-7 years ago, when issuance was booming. As the principal levels for those deals increasingly fall below 10% of their original balances, issuers could choose to exercise call options on their remaining obligations and sell the underlying credits to buyers like Pimco.

It's unclear how many people Pimco has hired for its effort. Any advantage it gets from being an early mover probably wouldn't last long, as other asset managers would likely put their mortgage-buying plans into action quickly. "Once that happens, there will be a giant swoosh into the marketplace," one investment professional said.

Pimco's undertaking is separate from a plan that surfaced in August in which the $1.1 trillion shop intends to resecuritize subprime mortgage bonds it owns. The company also issued six collateralized debt obligations from 1999 to 2006, according to Asset-Backed Alert's ABS Database.



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