Mortgage-backed securities are back! Sort of. Bloomberg reports that Citigroup is offering the first non-government backed private-label MBS deal in over two years. This is a market that has been largely expected to remain frozen for some time. Is it beginning to thaw? Not exactly.

Calculated Risk has a great brief analysis of why Citi's Sequoia Mortgage Trust 2010-H1 isn't just any old MBS deal. Its collateral is about as safe as an MBS investor could possibly dream up. Here are some of the characteristics that show why this deal will actually sell:

  • A weighted FICO score is 768. This means the borrowers have pristine credit.
  • The average Loan-to-Value ratio is 56%. This means, even if the mortgages have a whopping 44% loss rate, no investor will lose a penny of principal. (AAA investors have an additional 6.5% of cushion.)
  • These are very rich borrowers. The average loan balance is $932,699. And despite their lofty mortgages, the average borrower's debt-to-income ratio is only 27%.
  • All but two of the 255 borrowers have income of at least $10,000 per month. 22 earn more than 100,000 per month.
  • All but 16 of the borrowers have assets worth over $100,000. 76 own assets of more than $1.05 million.
  • Income and assets were verified for 100% of the borrowers.
  • All but eight of the homes are primary residences.

This deal is very small at $222 million. Most MBS transactions during the boom were in the billions of dollars. It's not likely that many squeaky-clean deals like this one can be originated at this time. So for the MBS market to really open back up, lower quality mortgages will have to be included. That, however, will likely continue to frighten investors in the near-term. So while this Citi deal is an important first step, it doesn't indicate that there's a lot more private-label MBS likely to come to market soon.

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