Updated November 30 at 6:25am

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BofA jumbo-deal delay shows market on life support


NEW YORK - A delay of Bank of America Corp.’s return to selling mortgage securities shows the housing bust is still limiting the market’s revival.

Its Merrill Lynch unit has been considering since last month a plan to package hundreds of millions of dollars of U.S. jumbo home loans it had acquired into securities, said four people familiar with the matter. With the firm mired in litigation over mortgages sold during the boom, executives are cautious about doing a deal, said the people, who asked not to be named because discussions are private.

While issuance of private home-loan bonds quintupled this year to $3.5 billion and is forecast to rise by as much as nine- fold in 2013, sales still pale in comparison to their peak of more than $1 trillion before the housing market slide starting in 2006. At stake in the nascent recovery are Wall Street profits, investor returns, homebuyer borrowing costs and the role of the government in housing finance.

“It would be a stretch to even call it reviving,” Jeremy Diamond, a managing director at Annaly Capital Management Inc., whose $142 billion of assets make it the largest real-estate investment trust that invests in mortgage bonds, said at an industry conference this month. “This year wouldn’t have even been a good month in any of the 10 years leading up to 2008.”

William Halldin, a spokesman for Charlotte, North Carolina- based Bank America, which bought Merrill Lynch & Co. in 2009 after acquiring top-ranked issuer Countrywide Financial Corp. in 2008, declined to comment on the potential transaction.

Mortgage costs

Costs from boom-era mortgages have helped send Bank of America stock down 46 percent from its 2010 high. It’s racked up more than $40 billion in costs from faulty foreclosures and sold-off housing debt and faces ongoing lawsuits from investors such as a class action suit led by the Iowa Public Retirement System.

The thaw in the non-agency market, for bonds without government backing, is being held back by the fallout from the global financial crisis it caused. Instead, programs backed by taxpayers are dominating originations, while banks are holding on to more mortgages as the weak economy limits other lending.

Investors and issuers also need to overcome lingering distrust of each other and the government, Jason Kravitt, a partner at law firm Mayer Brown LLP, said at the conference held last week by the Securities Industry and Financial Markets Association.

“It’s very hard to have a market where the principal investors are on a daily basis suing the principal issuers,” he said.

Pending regulations

For the biggest banks, the potential legal and reputational threats and impact of pending regulations “are all challenges that they have to deal with today that weren’t that relevant in the past,” said Chris Hentemann, a former head of global structured products at Bank of America’s securities unit through 2007.

The bank’s hesitation to securitize the jumbo mortgages it bought “doesn’t surprise me at all really,” said Hentemann, now chief investment officer at hedge fund 400 Capital Management LLC.

Still, the market is growing. Next year, sales may reach $20 billion to $30 billion, according to JPMorgan Chase & Co. analysts. Separate securities that government-owned mortgage insurers Fannie Mae and Freddie Mac are being pushed to create to transfer default risks may fuel a further expansion.

Issuance peaked at $1.2 trillion in each of 2005 and 2006, fueling the housing bubble, before freezing in late 2008 amid a home-price crash that reached 35 percent by February. The slump contributed to a global recession and more than $2 trillion in losses at the world’s largest financial companies.

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