TOKYO (Reuters) - A major issuer of U.S. mortgage-backed securities (MBS) is looking to expand its global investor base as the Federal Reserve, winding back years of monetary easing, divests its balance sheet of bond instruments.
The Fed’s disposal of billions of dollars of MBS each month is a challenge but also an opportunity to diversify, Michael Bright, acting president of the Government National Mortgage Association, told Reuters in a phone interview.
A lynchpin of the U.S. housing market, the federal agency known as Ginnie Mae guarantees approximately $2 trillion in MBS - housing loans packaged into bonds - with the explicit backing of the government.
MBS played a leading role in the global financial crisis that began in 2007 and led to the introduction of tougher regulations for investments in many developed economies.
While the Fed unwinds, Ginnie Mae has experienced an increase in demand from some foreign investors.
“There is global demand for yield, and this is a high-quality product that offers additional yield” above government debt, said Bright, regarding Ginnie Mae bonds.
Japanese purchases of bonds issued by U.S. government corporations and federally sponsored agencies like Ginnie Mae have risen steadily while, due to high currency hedging costs, Treasuries held by Japanese investors have dropped to a seven-year low.
Bright said demand for Ginnie Mae bonds was much stronger in Japan and China than in Europe, given regulatory limits on the types of bonds investors there can purchase.
“There seems to be a bit of a structural hangover in Europe from the financial crisis. But sovereign wealth funds across the globe are increasingly buying Ginnie Mae MBS,” Bright said.
There have also been investor concerns, however, notably regarding an increase in refinancing of mortgages by military veterans, he said.
Such activity could negatively impact a value of an MBS by potentially reducing its expected yield.
Ginnie Mae also faces a fundamental shift in the nature of mortgages it guarantees, with non-banks enjoying a far greater share of mortgage originations than traditional lenders.
In response, the agency was starting to run stress tests on issuers. “(We) get some preliminary internal results in December. So we’ll have a better feel of who might be stressed in a downturn,” Bright said.
Non-banks, more lightly regulated than banks, represent about 75 percent of the loans packaged in securities which Ginnie Mae guarantees, up from around 10 percent in 2011.
Bright told the U.S. Senate banking committee in July there was a concern about non-banks coming under stress if a loss of credit momentum coincided with rising interest rates.
Reporting by Shinichi Saoshiro; editing by John Stonestreet