More banks are selling high-stakes financial products that give investors exposure to America’s mortgages, car loans and corporate debt.

The new bond product offers high yields to investors — including some exceeding 5 percent — but places those same investors on the hook if the underlying loans go south, according to a report in the Wall Street Journal.

The newspaper reports that Texas Capital Bank earlier this year sold $275 million of these risk-transfer securities. In doing so, the regional bank added its name to a list of larger institutions selling similar bonds, including Citigroup and JPMorgan Chase.

“The addition of Texas Capital Bank to the roster in March this year shows there is potential for this mechanism to grow,” Simon Boughey, analyst at Structured Credit Investor, told the Journal.

For the banks, these products represent an opportunity to expand their balance sheets and ultimately lend more money. For investors, they offer higher returns than other bond products — but also an obligation to cover the losses when borrowers default on their loans. 

If this practice sounds familiar, it’s because it resembles some of the financial practices that became popular among investors in the mid-2000s, when the U.S. housing market was careening toward a mass foreclosure event.

Industry experts have said the housing market remains healthier today than it was during the run-up to the subprime mortgage crisis. Not only are today’s borrowers more qualified to take out debt, but their mortgages are also more likely to feature the fixed interest rates that ensure more predictable monthly payments.

Meanwhile, the record-high price increases appear to be driven by unique supply and demand factors that become more pronounced during the pandemic. These conditions may be starting to improve from a buyer’s standpoint, but remain far from a return to normal.

These types of securities were originally created to help protect Fannie Mae and Freddie Mac from some of the risks inherent in the mortgage market, the paper reported. Now, they’re becoming increasingly popular with institutional investors.

The yields on these new bond products can be more than double those of U.S. Treasurys and more traditional mortgage-backed securities, according to the report.

Their rising popularity also coincides with falling interest rates and declining yields from similar products.

“People want exposure to housing and consumer markets that are performing,” JPMorgan securities analyst Kaustub Samant told the newspaper. “Risk transfer securities are one of the few places that give high returns in this environment.”

Still, these products remain a very small part of the market, investors told the Journal. Time will tell whether they stay that way.

Email Daniel Houston

Show Comments Hide Comments
Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Success!
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription
×