An Old Champion Returns for Mortgage-Based Bonds

Lewis S. Ranieri helped pioneer mortgage-backed securities in the 1980s. On Thursday, his new firm priced its first mortgage bond deal.

With the recent turmoil in the bond markets, however, the offering was not without drama. The structure of the offering was changed to offer buyers more protection against losses, according to a person briefed on the matter who was not authorized to speak about the private deal.

The firm, Shellpoint Partners, of which Mr. Ranieri is chairman, sold  $251 million in residential mortgage-backed securities tied to loans that are not backed by Fannie Mae or Freddie Mac. The largest portion of the deal was sold at a rate of 2.85 percentage point above ultrasafe government debt, according to the person briefed on the deal.

Through a spokesman, Mr. Ranieri and Shellpoint declined requests for comment.

Bond prices have fallen since the Federal Reserve indicated that it planned to start reducing the stimulus it has used to keep interest rates low since the financial crisis.

For residential mortgage bonds without government backing, the fall has been steep. After a rapid climb in 2012, prices of these bonds began to stumble this year and have fallen about 3.5 points on average since the beginning of June, according to an index of prime and subprime mortgage-based securities from Markit.

“You had this panic that rates were rising, and you had all these redemptions coming out of bond funds,” said Ken Shinoda, portfolio manager on the mortgage-backed securiti! es desk at DoubleLine Capital. “There were a lot of things not trading.”

Few know this market like Mr. Ranieri, 66, who ran the mortgage group at Salomon Brothers in the 1980s and rose to become vice chairman of the firm. A college dropout from Brooklyn, Mr. Ranieri started in Salomon’s mailroom before distinguishing himself as a trader.

“He was a bull in a china shop,” said Robert F. Dall, a onetime boss of Mr. Ranieri. “He was a guy who knew lots about lots of things and was not loath to say so.”

By 1987, Mr. Ranieri was pushed out of Salomon, and he began a second career as a private investor.  As the financial crisis unfolded, he watched as mortgage bonds and other, more exotic mortgage-based products fell in value.

“I used to think we had done something important and good, and then, unfortunately, we had the last bubble,” Mr. Ranierisaid in a speech last week at the Bipartisan Policy Center in Washington. “The system we built showed the cracks and the clay feet.”

To Mr. Ranieri’s mind, there is another problem today: that the government still controls Fannie Mae and Freddie Mac, the mortgage finance giants it rescued in the financial crisis. That level of involvement by the government is “unacceptable,” Mr. Ranieri said.

But as the last-minute restructuring of Thursday’s deal showed, investors remain nervous about the types of investments Mr. Ranieri is pushing, which do not have government backing.

In addition, the Shellpoint deal had some features that raised eyebrows among prospective buyers. The security includes a number of loans to foreign nationals and real estate investors, in addition to a relatively high concentration of properties in California, according to a report by Fitch Ratings.

And yet, Mr. Ranieri remains determined to bring the market back to life.

“Hello,” he said in his speech last week. “I’m Dr. Frankenstein.”