Asset Securitization Report Columns
A recent story on Bloomberg reported that Treasury officials are leaning toward a specific option outlined in 2011’s white paper on the future of the GSEs. While their preferred option is impractical and unworkable, I believe that Fannie and Freddie can be restructured to serve as the foundation for a new mortgage system backed by private capital.
A recent story in ASR’s sister publication, National Mortgage News, reported that a number of conduits formed to securitize Jumbo-balance loans using private-label securitizations have recently been closed. This is not surprising, considering the continued difficulties the non-agency MBS market faces. Lenders’ inability to securitize loans has profound implications for the mortgage and housing markets, and will make the GSEs increasingly indispensible to housing finance.
In recent Senate comments, Federal Reserve Governor Elizabeth A. Duke said that “the failure of the housing market to respond to lower interest rates as vigorously as it has in the past indicates that factors other than financial conditions may be restraining improvement in mortgage credit and housing market conditions.” She is absolutely correct. Aside from the overhang of problem loans, housing remains weak because dislocations in the primary mortgage market have limited the availability of mortgage funds. Unless mortgage lending moves to a stronger footing and can better serve the broad housing market, home prices will remain under pressure.
The experience of HAMP and other initiatives suggests that a broad program to reduce the loan balances of underwater borrowers held or guaranteed by the GSEs would be extremely expensive and ultimately unsuccessful.
The passage of the payroll tax holiday exten-sion in December was, in my mind, a watershed moment for the mortgage and MBS markets. In this light, the operative question for regulators and policy makers is simple: “What are we trying to accomplish?”
Bloomberg recently reported that a number of dealers expect the Fed to initiate a new round of MBS purchases, with the goal of pushing mortgage rates lower and giving a boost to the still-sickly housing market. The idea of more MBS purchases raises a host of critical issues, particularly with respect to an exit strategy. Nonetheless, I believe that a well-conceived program can positively impact mortgage rates and housing.
Key elements of recent policy initiatives, such as the revised HARP program and the Fed’s “Twist,” have focused on either pushing down fixed mortgage rates or taking advantage of their current low levels. However, an underappreciated threat to the mortgage and housing markets is the reliance of many American borrowers on low Libor rates. This means that the Fed and other policymakers must be aware of the vulnerability of the U.S. housing markets to rate spikes resulting from upheavals in the European financial system.
Investors have recently focused on the difficulties encountered by the European banks, which hold huge amounts of troubled sovereign debt. However, I am quite worried over the state of the banking system in the United States. The recent changes to monetary policy by the Fed, the attempt by state attorneys general to coerce an onerous settlement over flawed servicing practices, and a continued litigation feeding frenzy have put the domestic banking system at risk. Whatever the legitimate grievances, the desire to both punish the banks and obtain reparations for past practices risks pushing the financial system into a new and immensely damaging crisis.
The recent focus on the economy and the jobless rate has, in the popular press, pushed the housing market from the front pages of the mainstream press. The continued weakness in the housing markets, however, is a major factor in the sapping of consumer confidence and the resulting lack of a robust rebound.
I recently completed the book Reckless Endangerment, a widely discussed and heavily promoted perspective on the mortgage and financial crisis. While the book is quite interesting and illuminating at times, it is a poorly written, incomplete and flawed analysis of recent events.
The regulatory agencies charged with implementing the risk-retention provision of the Dodd-Frank Act (DFA) recently announced that the comment period for their initial proposal will be extended to Aug. 1. As reported in the press, the delay resulted from widespread opposition to the definition of qualified residential mortgages (QRMs) as outlined in the March proposal. More fundamentally, it reflects the difficult tradeoffs involved in attempting to implement the risk retention provisions outlined in the DFA without limiting the access of large numbers of borrowers to mortgage credit and further damaging the housing market.
The latest impediment to non-agency securitization stemming from the Dodd-Frank Act (DFA) is the proposal to create “premium capture cash reserve accounts” (PCCRAs). This provision, contained in the recent interagency document that proposed how the “risk retention” provisions of the DFA would be defined and implemented, would require the creation of a cash account to prevent structurers from attempting to monetize what they define as “excess spread.” In my view, this proposal could be highly damaging to consumer mortgage lending and is premised on a flawed understanding of securitization practices.
As part of a joint initiative, the FHFA and HUD recently released a presentation outlining potential revisions to the current system of servicer compensation. The initiative’s stated goals are 1) improving customer service for borrowers, 2) reducing financial risks for servicers, and 3) helping servicers better manage their pipeline of nonperforming loans (NPLs). In light of the asset’s unusual economics, an examination of servicing compensation is long overdue.
The outcome of the negotiations between servicers, the group of state Attorneys General and the fledgling Consumer Financial Protection Bureau (CFPB) is extremely important to the future of housing and mortgage lending. The initial documents and press reports, unfortunately, are not encouraging. The proposed Settlement Terms released by the AGs in early March, combined with press reports of enormous fines being sought as part of any settlement, lead to the conclusion that the state and federal governments are together using the scandals arising from the servicing mess as a pretext to redistribute money from banks and investors to homeowners.
The joint Treasury/HUD report to Congress released this month was a major disappointment to market participants looking for a timely resolution to the status of the GSEs and the future of housing finance. While the white paper claims to lay out “the Administration’s plan to reform America’s housing finance market,” it unfortunately amounts to a set of poorly defined policy options that will likely require years to codify and implement.
Considerable uncertainty surrounds the recently postponed issuance of the mortgage securitization regulations required by the Dodd-Frank Act (DFA). In particular, two critical decisions involve the required risk retention contained in the DFA. The forthcoming directives will clearly have a major impact on the competitive and economic structure of the mortgage industry in the future.
While not quite the same as the agonies of 2007 and 2008, 2010 was another calamitous year for the mortgage and MBS markets. Here are my expectations on a variety of topics for 2011.
The recent news coverage has returned many mortgage and MBS-related issues, both real and illusory, to prominence. The initial headlines that stemmed from the announcement of problems with GMAC’s foreclosure filings have morphed into questions about the foreclosure process, the extent and potential cost of loan buyouts, and the legal standing of the securitized mortgage market itself. This article addresses some of the issues currently roiling the financial markets.
With a recent 4.32% print for the Freddie Mac survey rate, primary mortgage rates have hit all-time lows. However, mortgage rates remain stubbornly high compared to rates in the capital markets. The spread between the survey rate and the Fannie Mae current coupon rate has widened to around 100 basis points, well above its five-year average of +58. While this measure is an imperfect proxy for the relationship between consumer rates and market yields, it nonetheless implies that mortgage rates remain “sticky.” This relationship is dictated in large part by industry economics, driven by the level of lending activity relative to the mortgage industry’s capacity.
While the Wall Street reform bill passed this summer did not directly address the GSEs, it nonetheless affected future prospects for restructuring Fannie Mae and Freddie Mac. As I wrote last month, the bill created a series of impediments to any timely revival of the private-label MBS market, making the housing markets highly dependent on agency-backed funding. As a result, GSE reform will be limited by the need to avoid short-term disruptions that would freeze financing for the housing markets.
The Dodd-Frank financial reform act signed this month by President Obama was, in my reading, very unfriendly to the non-agency MBS market. Taken in its entirety, key provisions of the bill create significant and protracted uncertainty for issuers and investors, further delaying the much-anticipated revival of private-label MBS issuance.
A candid assessment of the causes of the crisis and the future of securitized lending forces us to address why the “market forces” that had protected investors in prior years failed to prevent the market from being flooded with flawed securities. It is imperative that we understand and identify market functions, determine why they broke down and devise both market- and regulation- based remedies.
A number of recent studies have documented the correlation between negative home equity and the incidence of defaults. A report by CoreLogic released in February stated that when negative equity exceeds either 25% of a loan’s balance or $70,000, “homeowners begin to default with the same propensity as investors.” While the linkage between the two factors is fairly clear, the full nature of the relationship between homeowner equity and credit performance is quite complex.