West Coast Bank Begins Sale Of $1.5 Billion in Securities
May 11, 2011
The bank put up for sale slightly seasoned pass-throughs and will use the proceeds to buy new production in the TBA (to be announced) market, traders said. A pass-through is a security made up of a pool of debt instruments, with the income from the debt passed through an intermediary -- usually a government agency or investment bank -- to the investors. By doing this, traders said, the bank hopes to profit from the premium prices that older mortgages currently command compared with new origination. The bank involved was said to be Bank of America, which declined to comment. The huge sale is being conducted over three days. Trading kicked off with approximately $90 million of deep discount 5.5% dwarf pass-throughs at midday Thursday. Other blocks from the bid list will be sold coupon by coupon Tuesday and Wednesday. Traders said there should be no problem finding buyers because of strong demand for the type of securities on offer. Older mortgage pools are considered more valuable by the securities market because they exhibit more stable prepayment behavior as interest rates change. Prepayments, which occur when homeowners sell, refinance, or make larger-than-scheduled mortgage payments, erode the value of mortgage-backed securities because they return principal early and reduce interest earnings. Meanwhile, the mortgage-backed securities market outperformed Treasurys, continuing a trend seen for much of August. However, the strength did not prevent 30-year pass-throughs from losing 9/32, compared to the 1/2-point drop in the comparable 10-year Treasury. In collateralized mortgage obligations, Federal Home Loan Mortgage Corp. announced two new deals. CMOs are mortgage-backed securities that have been sliced into parts to offer different yields and different levels of risk. One deal, a $250 million offering, is backed by 7.5% 30-year pass-throughs and underwritten by Smith Barney Inc.. The other, a $200 million offering, continues a chain from Donaldson, Lufkin & Jenrette Securities Corp.. The CMO is based on callable pass-throughs that were themselves structured by DLJ from a strips trust that was announced earlier in the week.
