NCUA begins selling from multi-billion dollar legacy asset fund

by Al Yoon

The National Credit Union Administration for the first time has sold some of its legacy securitized asset portfolio formed to help stabilize member institutions in the aftermath of the financial crisis, said Anthony Cappetta, a supervising financial analyst at the NCUA.

The NCUA today sold USD 18.3m (current) in non-agency RMBS via a noontime BWIC, according to two investors familiar with the BWIC. The pilot sale included some hard-to-source wrapped bonds, including an MBIA-insured USD 10.6m GMACM 2007-HE1 A5 and a USD 2.5m RAMP 2003-RZ1 A17, backed by Ambac, they said.

The bonds are a corner of the approximately 225 securities that have been freed up from the NCUA’s Guaranteed Notes (NGN) program that re-securitized assets for long-term funding, according to Cappetta and the NCUA website. As of July, those bonds had a total market value of USD 1.7bn, representing about 70% of the outstanding principal value, the website shows.

Cappetta confirmed today’s sale was done with risk management in mind, and because prices on the bonds are expected to be close to par value.

“It’s an orderly process of removing risk from the NGN program,” Cappetta said. “We are in no way liquidating them … they are trading at full or fair value, and we are simply reducing the risk should the economy take a turn.”

The NCUA legacy portfolio balance was USD 13bn as of 2Q16, down from USD 40bn in 2010, the website shows. It has certainly paid down more since 2Q16, Cappetta said.

More legacy assets will be freed up until the last of them matures in 2021, Cappetta said. Of more than USD 28bn in NGNs issued, less than USD 9bn remained as of 2Q16 due to principal paydowns, and at least one has paid off ahead of schedule, the website shows.

Investors are hoping the NCUA will be a meaningful source of supply in a market where large offerings are scarce, said the two investors familiar with the BWIC. Fannie Mae and Freddie Mac are potentially large sellers of non-agency RMBS with about USD 30bn held as of November, but the former will be slowing its offerings this year, according to a source familiar with the GSE. Federal Reserve Bank of New York Maiden Lane portfolios that included USD 20bn of AIG’s non-agency RMBS were cleared out by mid-2012.

A 2Q16 NCUA document shows the administration has contemplated outright sales of legacy assets when NGNs mature. Other options would be to re-securitize the remaining cash flows but without an NCUA guarantee, or hold the assets until they mature by 2038, it said in the document.

There is a “wide variety” of options for managing the assets, Cappetta said.

Arguments for outright sales include freeing the NCUA from the oversight of legacy assets, reducing market risk and a quicker collection of proceeds, the web document said. Another document noted that some bonds don’t mature for another two decades, leaving them open to rising defaults in a down market.

Few investors expect the non-agency RMBS market to falter this year as house prices rise and job growth continues. Investors have been tweaking cash flow models to account for improvements in housing and borrower credit, justifying higher prices, a third investor said.

But years of gains for non-agency bonds and a shrinking market have led to reduced participation in the market. Gary Kain, a widely-followed mortgage REIT manager who once ran Freddie Mac’s investment portfolio, on Thursday said he anticipated the capital deployed to the sector by his MTGE Investment Corp. would likely decline over time despite his expectations of strong credit performance.

Portfolio sales from the Federal Reserve Bank of New York have been buoyed by market strength and buried as it evaporates. The bank suspended regular sales from its Maiden Lane II portfolio in 2011 after market sentiment soured, in part because of the expected supply and profit-taking by hedge funds, as reported. The New York Fed later sold off the portfolio.

The NCUA’s Temporary Corporate Credit Union Stabilization Fund was built with more than 2,000 legacy assets held by the NCUA and secured by about 1.6m residential mortgages, as well as commercial mortgages and other securitized assets, the NCUA website shows. Approximately 87% of the assets are non-agency RMBS.

The auction comes as the NCUA has reported an improvement in cash flows from legacy assets and recovered a net USD 3.2bn in settlements from several bond issuers including JPMorgan, Goldman Sachs and Barclays. Payments directed to the TCCUSF helped the association retire the last USD 1bn of its USD 11.2bn in US Treasury borrowings on 24 October, according to the NCUA website.

JPMorgan emerged as one of the most aggressive bidders for Thursday’s BWIC, one investor said. The large MBIA-insured bond drew especially strong interest due to its size and the value of the wrap, he said. It was expected to trade around 102.5, he said.

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