Federal Reserve Plans 2 Auctions of AIG Mortgage Securities

By Al Yoon | April 11, 2011

The Federal Reserve Bank of New York is planning two auctions of risky mortgage-backed securities from its Maiden Lane II portfolio next week, the bank’s website indicated Friday.

The sales would be the Fed’s second and third from the portfolio that was created during the depths of the financial crisis to absorb the troubled “private-label” mortgage bonds from AIG and help prevent the collapse of what was the world’s largest insurer.

The auctions are gripping U.S. markets, as they represent a rare opportunity to purchase the high-yielding securities in bulk and could give some transparency to the $1.3 trillion market, where value is tough to discern. The descriptions and sizes of bonds for the next sales on April 13 and April 14 will be announced Monday.

AIG last month offered $15.7 billion for the entire portfolio, but the Fed last week said the public interest in maximizing returns and maintaining market stability would be better served by selling the assets competitively. The face amount before this week’s sale topped $30 billion.

The initial auction met with stronger-than-expected demand, according to some dealers and investors. About $1.3 billion out of $1.5 billion face amount traded in that sale.

“The Fed has to be pleased with the results,” Richard King, chief executive officer of Invesco Mortgage Capital , which buys residential mortgage-backed securities, said on Thursday.

“It’s just technically very-well bid,” he said of the market for private-label RMBS, where investors clamor for yield and a lack of new issuance means supply is shrinking.

Still, there is disagreement on value in the securities, whose underlying loans are tainted by delinquencies and losses due to lengthy foreclosure proceedings. The bonds, created by Wall Street investment banks, were a cause for the lending excesses that caused the U.S. housing bubble.

Some prices received by the Fed in this week’s auction were far above secondary pricing levels, according to one trader. That suggests the the bids were inflated to curry favor with the Fed or support positions of dealers that had taken on large portfolios in recent weeks.

The securities had shown some signs of softening after rallying 50 percent or more over the past two years.

RMBS backed by prime 30-year fixed-rate jumbo loans declined to about 93 cents on the dollar last month from 95 cents in February and 97 cents in January, according to Amherst Securities Group data. Prices on the riskier bonds backed by payment-option adjustable-rate mortgages and subprime mortgages also declined slightly, the data showed.

(Editing by Dan Grebler)

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