Dutch gamble on U.S. housing debt after patience wins
By Jody Shenn and Maud van Gaal Bloomberg News
NEW YORK – The Dutch government’s decision to hold onto U.S. mortgage debt acquired during the 2009 bailout of ING Groep NV has paid off so far as prices of the securities soared, more than doubling in some cases from lows that year.
The nation now is planning to sell all $12 billion of the bonds, many of which are tied to borrowers who were deemed more risky after failing to document their incomes or taking on mortgages with growing balances. ING, the Netherlands’ biggest financial-services company, said last week the current market value of the bonds is about 71 percent of the face amount. The government may see a gain of almost 800 million euros ($1.1 billion), Finance Minister Jeroen Dijsselbloem told Parliament.
The payoff for the Netherlands and the consequences for the $800 billion market for U.S. mortgage bonds without government backing will depend on how well it can unwind the bet with the help of BlackRock Inc. The sales, which require European Union approval, are targeted to be finished within the next year. Risks over that period include the forecasted reduction of the U.S. Federal Reserve’s unprecedented economic stimulus, potential continued sales of the debt by Fannie Mae and Freddie Mac, and the possibility of more budget battles by U.S. lawmakers like the one that roiled global markets last month.
“Timing is everything,” said Michael Canter, head of securitized assets at AllianceBernstein LP, which oversees more than $250 billion in fixed-income investments. “If they try to sell when there’s not a lot of liquidity out there, it could be a really bad thing. But if the markets are in a good place, it definitely could be absorbed without a hitch.”
ING received a 10 billion-euro capital injection in October 2008, when mortgage-backed securities held at its U.S. units plunged in value after foreclosures soared and property prices plunged. In a second round of aid in January 2009, the Netherlands assumed 80 percent of the risk on the 27.7 billion-euro portfolio of mortgage bonds.
ING sold the securities to the Dutch state at a discount, while giving the government a loan, which shrank as the mortgages underlying the debt defaulted or were repaid.
While down from post-crisis peaks reached earlier this year, prices have gained in 2013, ratifying the Dutch decision to hold. Typical prices for a type of Alt-A bonds among the holdings rose last week to 73.75 cents on the dollar, from 65 cents in January, Credit Suisse Group AG data show. The debt, tied to borrowers who often qualified with limited documentation or bought investment properties, rose as high as 75 cents in May.
The rally in U.S. non-agency home-loan bonds fueled by a housing recovery and the Fed’s $85 billion in monthly debt buying was interrupted in June as speculation grew that the central bank would scale back the purchases. It resumed after the Fed unexpectedly said in September it would hold off on tapering.
Over the past month, securities backed by option adjustable-rate mortgages, another type held by the Dutch, have gained 2 cents to 70 cents, according to Barclays Plc data. The notes, tied to loans that can allow borrowers to pay less than the interest they owe by increasing their principal, fell as low as 33 cents in 2009.