The unit manages more than $25 billion in assets for E*Trade Financial, the holding company that has been transformed from an online broker into a diversified financial services player in recent years.
E*Trade is amassing a sizable portfolio of loans and has acted as collateral manager on two collateralized debt obligations. Can you explain how the firm is set up with respect to securitization?
E*Trade Financial Corp. is the bank holding company in the corporate structure. Within that, there's E*Trade Bank and the other side is E*Trade Global Asset Management. We also conduct all secondary loan activities for our mortgage originators. Collectively, last year we did over $12 billion in mortgages and we also manage all the investment securities, which are another $10 billion. We've also done two CDOs, giving us $600 million in assets under management away from the bank. These are both static deals. And, then we manage about $5 billion in prop money market funds from the sweep accounts from the brokerage customers.
Your growth has come at a time of low interest rates. How will a rising rate environment affect you, in terms of origination and securitization?
Three years ago, we were predominantly invested in mortgage-backed securities, but since then we have been selective in terms of which securities go into the balance sheet. By way of example, when rates were low, we would retain only the hybrids, which are adjustable-rate mortgages, and we would sell the fixed-rate mortgages. We would look at the value of these whole loans sales, as a sale and as a securitization, and would have the Street bid accordingly. We've also done two securitizations of our mortgage collateral, for $500 million and $1 billion. What we keep and what we sell is primarily dependent on the portfolio needs. Our primary motivation now is to develop a track record. In the past, we did whole loan sales, but now we want to be able to securitize or retain any part of that capital structure.
You say you plan to increase your ABS issuance in the coming years--how will you get investors comfortable with your name?
We're very active in the prime mortgage market. We did $12 billion in originations last year, and we've already surpassed that this year. So, that's $25 billion in the last two years. At this point, people on the mortgage side know us and our program. And, we plan to bring another mortgage securitization by the end of this year.
You also have a growing portfolio of credit card, marine, recreational vehicle and other consumer loans. When can we expect to see these sold as a securitization?
To date, we have been originating these loans for our own balance sheet. You may see a consumer finance securitization in late 2004, as our capacity to originate will exceed our capacity to hold. E*Trade is still not known as a bank, but as we migrate away from discount brokerage more to financial services, more and more customers will come to our website and find our products and our originations will pick up. Quarter-over-quarter our originations will go up, and we will use securitization as a funding vehicle.
What about your CDO business? Isn't it unusual for a lender to be acting in that role?
What makes us a better CDO manager than the next guy is that we know the intricacies of the lending arrangements. All of our asset-backeds are predominantly real estate-related. That's our forte. When we look at originating a loan, we are a national lender that knows the weak and strong markets, and that's an expertise that typical secondary portfolio managers may or may not have. We're the originator of loans and we have the servicing reports. So that's significant lead time. If you look at our CDOs, we were the only ones ever to do ABS CDOs where the preference shares [equity] or residual asset class was rated investment-grade. And that speaks volumes to our ability to manage risk and select assets.
What about personnel--are you adequately staffed to meet your ABS and CDO ambitions?
We are adequately staffed for the next six months. As we gear up to do some consumer finance securitizations in 2004, we will probably be adding some additional infrastructure. The boat and RV portfolio we have, which does $1.5 billion in originations a year, is a former lending unit of Deutsche Bank and is used to securitizing. So securitizations won't be truly uncharted grounds for that group, it will be more of a reactivation of a program. The nice thing is we've been able to put together a seasoned portfolio management team. Our average senior portfolio manager has about 15 years of experience and comes from the likes of Fannie Mae. And even through E*Trade itself doesn't have a reputation, the managers do. It's incumbent on us to start building that track record and that's what you'll see. We know that our future business hinges on how well we do these first couple of deals.