Tags: New York Fed Sold 1.3 Billion of Mortgage Bonds in Auction

New York Fed Sold $1.3 Billion of AIG-Linked Mortgage Bonds in Auction

Thursday, 07 Apr 2011 12:37 PM

The Federal Reserve Bank of New York sold $1.3 billion of mortgage securities in the first round of its auctions tied to the U.S. rescue of American International Group Inc.

The New York Fed had offered $1.5 billion of the securities, according to a posting on its website. The central bank didn’t disclose the amount paid. In a separate statement today, the Treasury Department said it sold $3.9 billion last month of a different type of mortgage bonds, which are guaranteed by government-supported Fannie Mae and Freddie Mac.

The Fed is selling its securities in blocks, after saying March 31 that it would refuse an offer from New York-based AIG to buy back the entire pool for $15.7 billion. The current balance of the investments had totaled about $31 billion, according to the insurer’s disclosures.

“Round one appears to have been a success,” said Bryan Whalen, co-head of the mortgage-backed bond group at Los Angeles-based TCW Group Inc., which oversees $115 billion in assets. “There was a fair amount of interest from investors and it seems like the dealers are willing to fill in the gaps” on less-popular securities, he said.

Jack Gutt, a New York Fed spokesman, declined to comment.

Selling Holdings

The Fed’s AIG-related mortgage-bond holdings are so-called non-agency securities that don’t carry the backing of Fannie Mae and Freddie Mac or federal agency Ginnie Mae.

“AIG continues to believe that AIG and the taxpayers, who own 92 percent of AIG, would be better served by public auction of the entire block of securities,” Mark Herr, a spokesman for AIG, said in an e-mailed statement.

The central bank also bought $1.25 trillion of agency home- loan securities through March 2010 in a bid to bolster the economy.

The Treasury said March 21 that it would unwind its $142 billion of agency mortgage bonds at a faster pace, by selling as much as $10 billion a month.

Repayments and defaults on the underlying home loans also are shrinking the balances of the Treasury’s holdings, which the department began accumulating after seizing Fannie Mae and Freddie Mac in September 2008 as then-Treasury Secretary Henry Paulson sought to stabilize markets and reduce the cost of mortgages amid the worst global financial crisis and U.S. housing slump since the Great Depression.

The total amount of non-agency bonds the Fed plans to sell roughly equals the amount by which the $1.3 trillion market contracts each month as properties of defaulted homeowners are sold and other loans are refinanced, JPMorgan Chase & Co. analysts said in an April 1 report.

‘Minimal’ Disruption

“We expect the sales to be done in a slow orderly process with minimal market disruption,” partly because the Fed said it would set “reserve” prices for specific bonds and won’t sell the securities below that level, the New York-based analysts led by John Sim and Ed Reardon said in the report.

The New York Fed said last month that it would publish monthly updates on the AIG-related assets it holds and a list of the securities sold. It also will give quarterly updates on proceeds and the total amount purchased by each counterparty, according to the statement. Three months after the last of the investments is liquidated, the Fed plans to disclose who bought individual securities and at what price.

Auction Cover Prices

The Fed sold 42 of 52 bonds offered this week, it said. The second-best bids, or so-called covers, for the securities ranged from at least as low as about 20 cents on the dollar to at least as high as “low 90” cents, according to three investors who received the information from dealers. They declined to be identified because the data wasn’t public.

The lowest cover bid may have been for a junior-ranked bond created by Wells Fargo & Co. in 2006 and backed by subprime and home-equity loans, according to the investors and data compiled by Bloomberg. About 40 percent of loans underlying those bonds are at least 60 days delinquent, the data show.

The highest amount paid in today’s auction may have gone for a senior security created in 2005 by Nomura Holdings Inc. and backed by mostly adjustable-rate mortgages made with limited documentation, according to the people and Bloomberg data. More than 34 percent of that debt was at least 60 days past due, Bloomberg data show.

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