The $3.2 billion government-backed offer from Switzerland's UBS to buy its troubled competitor, Credit Suisse, is a relief to the U.S. mortgage market in part because the two companies have some limited ties to it, but more because it stabilizes European financial institutions that broadly support industry funding.
"European banks are being protected by their regulators and that is important because they provide a lot of warehouse financing," said Jon Van Gorp, chair at law firm Mayer Brown, referring to the funds mortgage lenders use in their loan pipelines.
So while neither Credit Suisse or UBS alone might currently be a dominant player in U.S. mortgages, if the former's unique financial and regulatory challenges were to reach the point where they disrupted institutions in Europe more broadly, the market might've faced a dangerous funding crunch.
Credit Suisse and other European banks have "helped to finance the expansion of nonbanks" in the United States, said Chris Whalen, chairman of Whalen Global Advisors, an NMN columnist, and former senior managing director at Kroll Bond Rating Agency.
It's worth noting in terms of Credit Suisse's direct relevance to the U.S. mortgage market that it historically has been involved in developing some particularly innovative warehouse and mortgage-servicing rights financing vehicles involving assets like Ginnie Mae MSRs or non-QM loans.
Also, its holdings have included Select Portfolio Servicing. SPS had a portfolio of servicing rights tied to around 942,000 residential mortgages with an unpaid principal balance of $179.5 billion as of Sept. 30, 2022, according to Fitch Ratings. In addition, Credit Suisse Securities (USA) LLC has ranked fourth as a bookrunner, or primary underwriter, in the small private-label residential mortgage-backed bond market with a 10.9% market share, according to NMN's sister publication
Credit Suisse late last year was able to sell a significant part of its securitized products group and affiliated businesses to Apollo Global Management, with the majority of the assets and professionals involved now operating as Atlas SP Partners. But Credit Suisse retained $20 billion in Ginnie Mae assets and SPS in that deal, according to Whalen's
So while news about the agreement between Credit Suisse and UBS "was very welcome" in terms of the stability it brings to European banks and the acquired company's U.S. mortgage market ties in the short-term, there are questions about whether the buyer will want to remain involved in housing finance here. As the securitized-product group sale suggests, Credit Suisse has been downsizing, and UBS is
UBS has had relatively little in the way of direct ties to the U.S. residential mortgage lending and servicing recently, according to Home Mortgage Disclosure Act data compiled by Recursion. It has had a small portfolio of servicing related to mortgages backed by government-sponsored enterprises Fannie Mae and Freddie Mac, and less than a 1% share in lending.
The acquiring company is unlikely to want to add exposure to U.S. home lending and servicing as it has distanced itself from the securitized residential mortgage market in the United States since it and others faced legal and regulatory actions in the wake of the Great Recession. The crisis followed a period when private-label loans market-wide underperformed due to weak underwriting that existed in the past.
Credit Suisse also has faced
Some think that currently UBS and Credit Suisse alone don't have large enough stakes in the U.S. mortgage market to disrupt the large market for securitizations that have government-related backing, older low-rate versions of which recently factored into Silicon Valley Bank's demise. This market is distinct from smaller private-label RMBS and has been recovering from SVB concerns due to
"The market would likely recover quickly even were Credit Suisse to exit mortgages," said Nicholas Gunter, co-founder and chief solutions officer at Infima Technologies, a data and analytics firm that specializes in predicting the behavior of borrowers, securities and markets.
One threat to European lending that the acquisition does not address is the exposure of investors who bought bonds from banks with the understanding they'd be sharing the institutions' risk. Roughly $17 billion of these bonds, known as additional Tier 1 or contingent convertible securities, have been written down at Credit Suisse and there are around $250 billion of them in the European market, according to reports by
Such concerns, or continuing issues with bank failures in the U.S. could still possibly lead to some contraction in the funds available to lenders.
"In the near term my biggest housing-related worry is that smaller banks facing deposit runs will pull back from lending. If this spreads the bigger banks could become more cautious as well," said Richard Koss, chief research officer at Recursion. "If we get a truly hard landing with rising unemployment — not a sure thing by any means but possible, then servicers already stressed by revenue pressure stemming from low transaction volumes could face increasing cost pressures as well. This would fall hard on thinly capitalized nonbanks."
