Rebirth of Mortgage Swaps

ICE said to be pitching new breed of residential-mortgage swaps for the Dodd-Frank era.

IntercontinentalExchange Group Inc. (ICE) is pitching Wall Street on new derivative contracts allowing investors to wager on U.S. homeowner defaults, six years after subprime-mortgage swaps helped fuel the financial crisis, according to five people with knowledge of the matter.

ICE, which owns the biggest clearinghouse of swaps tied to the creditworthiness of companies, is gauging interest among banks and investment firms for a contract linked to a new type of mortgage securities that Fannie Mae and Freddie Mac started selling last year, said the people, who asked not to be named because the discussions are private. The government-backed firms have issued $4.5 billion of those bonds, which share the risk of home-loan defaults, as policy makers seek to scale back their roles in the $9.4 trillion mortgage market.

Fannie Mae and Freddie Mac were seized by the U.S. in 2008 during a crisis that was exacerbated by the wagers on subprime mortgages made with credit-default swaps. The side bets multiplied losses at banks such as Citigroup Inc. and insurers including American International Group Inc. and allowed bearish investors to accelerate the contraction in credit.

“There is a definite potential downside, as history clearly shows,” said Michael Canter, head of securitized assets at New York-based AllianceBernstein Holding LP. On the other hand, there’s already a series of index-based swaps that serve important roles in corporate-credit trading, he said.

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