New Appetite for Mortgage Bonds That Sidestep Fannie and Freddie

Wall Street is diving back into the business of turning home loans into bonds, injecting new competition into a market long dominated by government-backed mortgage giants Fannie Mae and Freddie Mac .

The so-called private-label mortgage market—in which financial firms serve the middleman role of creating giant pools of loans and selling them to investors—had more than $42 billion of issuance in the second quarter. That is the most since the pandemic started and almost the most for any quarter since the last financial crisis, according to Inside Mortgage Finance, an industry research firm.

This market still made up a mere 4% of all mortgage bonds issued last quarter. Fannie Mae and Freddie Mac, which issue bonds that come with a federal guarantee that investors will get paid, remain the industry’s dominant players.

But mortgage investors expect the private market to keep growing as a repository of loans that Fannie and Freddie can’t or won’t purchase, such as those tied to investment properties, super-expensive homes or self-employed borrowers. Recent issuers include Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co., as well as a growing array of banks and real-estate firms.

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