Dealer shelf transactions are gaining traction in the mortgage-related market and by some estimates now account for as much as half of the total sales this year, up from about 30% last year. The trend is being spurred as banks in general are taking more principal risk across the board through avenues such as proprietary trading desks and these transactions are no exception, as dealers including Credit Suisse First Boston and Barclays Capital are buying loans directly from mortgage lenders and repacking them into bonds.
"If your client is selling whole loans and you are not buying whole loans, then you are missing out on a fair amount of their business," said Greg Richter, managing director and head of asset finance capital markets at CSFB in New York, on why banks are competing for the whole loan business.
To be sure, while the collateral for dealer shelf sales is the same as for traditional deals underwritten by banks, which are referred to as agented deals, dealer shelves tend to trade at a discount because they are perceived as less liquid. Senior classes, for example, trade a few basis points wider on dealer shelf sales than they do on traditional mortgage-backed securities.
And even if mortgage originations drop with higher rates on the horizon, bankers said they still expect to see whole loan sales and subsequent dealer shelf transactions as a regular feature of the asset-backed landscape. That's because large mortgage originators see the whole loan bid as an alternative means of financing to selling traditional deals. "Big issuers need to tap both sides of the market. Diversification of funding is important to specialty finance companies because the market has grown so quickly," said Michael Wade, managing director and head of the U.S. asset securitization group at Barclays in New York.
