Banks Are Back in the Mortgage Bond Business
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What is the main topic discussed in this episode?
Here's your Money Briefing. I'm J.R. Whelan at The Wall Street Journal in New York. Big banks are back in the mortgage-backed securities business. Ten years ago, missteps in that business helped trigger the financial crisis, and bankruptcy is rampant not only on Wall Street, but Main Street as well. In a moment, we'll find out what's different this time around. First, some money in market news you should know. The Association of American Medical Colleges says that students who graduate from medical school have a median debt of roughly $200,000, and about 70% of medical school students graduated with debt in 2017. New York City's Weill Cornell Medicine is addressing that by increasing its scholarship offerings by $160 million to eliminate education debt for students who can prove financial need.
What is driving big banks to re-enter the mortgage-backed securities market in 2026?
Currently, about a third of students are able to fully pay for school. Mount Sinai, also in New York, recently restructured its scholarship program so students don't graduate with more than $75,000 in debt. And New York University covers tuition for all its medical students, regardless of financial need.
Citigroup, Goldman Sachs, Wells Fargo, and JPMorgan Chase are getting back into the mortgage bond business. That's when banks pull mortgages and turn them into securities. That may ring alarm bells for some. Remember, those are the same kind of bonds that were at the center of the 2008 financial crisis.
How do mortgage bonds get created and who traditionally bought them?
They pushed big banks into bankruptcy and a lot of Americans along with them. Investment banks have stayed away from the mortgage bond business since then, but not anymore. So what's different this time? Let's bring in Wall Street Journal reporter Ben Eisen for some answers. So Ben, just explain for us how this works. The bank buys a mortgage and then turns around and sells it to an investor?
Yeah, so when you get a mortgage, if you are buying a home, you might get it from a lender, but that lender doesn't necessarily hold on to it and kind of keep it on their books for the life of the loan. What they might do is they might take a pool of mortgages and sell them. And for the most part, those mortgages have been sold to Fannie Mae and Freddie Mac, which are government-sponsored enterprises. Not only do they buy them and package them into securities that they sell to investors, but they guarantee payment on those mortgages. And those have traditionally been very safe investments because the government is sort of seen to stand behind the mortgage borrowers and the investors will get paid if anything goes wrong.
Now what we're seeing is you're seeing some of these mortgages are instead going into what's called the private label market, which is not government-backed.
What is the difference between government-backed and private-label mortgage securities?
Instead of Fannie and Freddie buying the loans, you have other institutions buying and packaging the loans and selling them to investors. And what's new now is you're seeing banks start to get back into this business. Banks had been big in it before the financial crisis, but had really stepped out of it for about a decade since until just about the last year or so. They've kind of gone back into the business.
Saying that the nation's biggest banks got burned by these bonds is an understatement. Why are they getting back into this market?
Well, it's important to note they got burned by these bonds over a decade ago. And in the years since then, there have been a lot of changes to the mortgage market, both in terms of who's making the mortgages and how they're packaged and sold to investors. And now we've sort of gotten to a point where the crisis has sort of gotten far enough into the rearview mirror that banks are starting to feel comfortable making these mortgage bonds again.
How large is the bank's role in this compared to 10 years ago?
It's tiny. It's minuscule. Whereas the so-called private label mortgage bond market was over a trillion dollars annually at its peak, last year it was about $70 billion. So it's a lot smaller, but that said, it's growing. So it's something that the folks who are making these mortgage bonds are starting to feel more comfortable doing them again.
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Chapters
6 chapters
1
What is the main topic discussed in this episode?
0:05–0:53
2
What is driving big banks to re-enter the mortgage-backed securities market in 2026?
0:53–1:34
3
How do mortgage bonds get created and who traditionally bought them?
1:34–2:44
4
What is the difference between government-backed and private-label mortgage securities?
2:44–4:12
5
How big is the banks' role in the private-label mortgage market compared to before the financial crisis?
4:12–5:25
6
Are banks being more cautious now and how have underwriting standards changed?
5:25–7:22
Speakers
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