CORRECT: Veteran Mtge Bond Trader Navigates Brave New World
April 22 2009 - 2:49PM
Dow Jones News
Kurt Weisenfluh knows mortgages.
For more than 20 years, Weisenfluh, 41, has traded in the $4.7
trillion market for mortgage bonds guaranteed by housing finance
heavyweights Fannie Mae (FNM) and Freddie Mac (FRE).
Weisenfluh has seen more changes in the last seven months than
in any other year working in financial markets. The government is
now the major player in the market, having seized control of Fannie
and Freddie, while the Federal Reserve has bought more than $350
billion of the mortgage bonds guaranteed by the agencies in an
attempt to knock home loan rates lower. The market has also become
an integral part of plans to reinvigorate home lending.
While Weisenfluh says a long career has prepared him for ups and
downs in the market, there's little that can be compared with the
current environment.
"There's no blueprint for any living member of the [trading]
community," said Weisenfluh, who is now the head of mortgage
trading unit at Barclays Global Investors in San Francisco. "We
have to pick through what we have learned over many years and
scenarios" and cobble together a strategy to apply to a world
upended by the credit crisis.
The Fed's heavy buying of mortgages, though unprecedented, isn't
much different than the period from 2003 to 2006 when commercial
banks were the dominant buyer of these securities, said Weisenfluh.
"They just plain dominated the flows. Although the markets
themselves may have been wildly different, this concentration of
power is a key similarity," he said.
The Fed's disclosure of how many securities it's buying,
however, is different.
"The way they're divulging today's market activity is creating a
more level playing field in terms of information that is shared...I
think this is having a calming effect on the high grade mortgage
rate markets."
A Smaller Market Ahead
During his years trading at Merrill Lynch & Co., Lehman
Bros. Inc., Bear Stearns & Co. and Smith Barney Inc.,
Weisenfluh was working in a market undergoing a growth explosion as
a boom in housing fueled a surge in new bonds.
Now, falling home prices and rising unemployment rates have
battered consumer confidence and curbed the demand for new loans.
The market will shrink as a result, says Weisenfluh.
Restoring confidence is a prerequisite to revitalizing the
mortgage markets, he says. The government is doing its part to
lower rates, but the pool of potential buyers has already shrunk
because consumers are worried about the outlook for housing as well
as the broader economy.
A smaller number of banks offering loans and tighter lending
standards also mean that borrowers who want loans have to wait
longer to get financing.
The sales and collapses of some banks - like Merrill, Lehman and
Bear - also means "a lot less people control a lot more money" on
Wall Street, said the veteran trader.
With the surviving banks still dealing with balance sheets
bloated with toxic assets, they are concentrating their trading on
risk-free, agency bonds, Weisenfluh said.
Fannie and Freddie are the "only game in town in the new issue
space," he said.
The non-agency market where subprime and other risky home loans
were bundled and sold has been frozen after complicated securities
backed by risky home loans soured - triggering the financial crisis
and global economic slump.
For that market to come back, Weisenfluh says securities will
have to be simplified from the creative financial engineering that
gave rise to thousands of different structures during the boom.
Given that Fannie and Freddie are doing most of the business, it
is highly likely that the non-agency mortgage market will take cues
from them, he says.
"If the agency market is in recovery mode and fully functional,
why wouldn't the non-agency market benefit from at least some part
of this mindset?," he said.
-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371;
anusha.shrivastava@dowjones.com