A trade group for the securities and banking industry, the Securities Industry and Financial Markets Association, is advising the Treasury that several things need to happen to wake up mortgage funding.
As it stands, originations for mortgages are in the doldrums, especially when refinancings are ruled out of the numbers. One suggested, potential way to get certain sectors of the population interested in actually buying a house is to enhance funding options.
The revitalization of the private sector mortgage bond market, albeit with safer operational capacity than experienced in 2006 and 2007, is seen as one such solution. This would act as competition to the government-sponsored enterprises Fannie Mae and Freddie Mac as well as the Federal Housing Administration.
However, as SIFMA points out, “regulatory uncertainty, disagreement over roles and responsibilities of transaction participants, and the comparative advantage provided to GSE and FHA mortgage-backed securities due to government guarantees and preferential regulatory treatment,” continue to keep sophisticated investors reluctant to return.
Repairing the private mortgage bond market still remains a top priority for the federal government, even though there seems to be no huge rush to get things going again. For its part, Treasury is asking for some advice on the further development of private-label securitization.
“As we look to the future of housing finance, it is imperative for the private sector to play a more active role,” said SIFMA CEO Kenneth Bentsen. “Private-level securitization can and should play a bigger role than it does today.”
Here are the 8 things SIFMA said can help spark the mortgage markets:
1. Basic economics
PLS execution generally comes at a higher all-in “cost” than GSE and bank portfolio execution today. SIFMA members believe there is a need for investors to have greater confidence to invest in mortgage credit risk in the PLS market, which would make PLS pricing more favorable and increase liquidity. Efforts to improve PLS markets should focus on reducing current roadblocks, leveling the playing field, and increasing the competitiveness of PLS so that issuance can rebound over time.
2. Address investor concerns
Investors continue to express a number of concerns regarding data and transparency of cash flows; documentation; the roles and responsibilities of transaction participants, enforcement of contractual terms; and eminent domain and other ex-post policy changes, among others concerns listed in SIFMA’s letter.
3. Address originator, sponsors and issuer concerns
Issuers of PLS need to be able to estimate future costs of doing business in order to be willing to commit capital. The current level of uncertainty in the regulatory, legal and policy environment makes this very difficult. Along with economic factors discussed above, this uncertainty undermines issuer and sponsor incentives to increase their PLS issuance.
4. Clear up housing policy
Uncertainty regarding the direction of GSE reform and broader housing policy questions have discouraged PLS issuance. Issuers and investors are not likely to build the infrastructure necessary for a vibrant PLS market until they have a better understanding of how the government’s role in mortgage funding will change. Further, conflicting signals from policymakers regarding acceptable mortgage practices have also been detrimental to PLS issuance. Policymakers are exhorting originators to loosen credit standards, but certain policy actions have had the effect of driving investors away from PLS or causing originators to lend more conservatively. A clear direction for the future of housing finance reform would support greater private investment in the mortgage market.
5. Move GSE reform forward
The appropriate level of loan limits and underlying credit profile of loans eligible for a government guarantee should be reviewed as these will help define the role of PLS. Reducing the government’s footprint creates room for the PLS market to operate and grow.
6. Finalize regulations
Regulatory reform of securitization, including issues of disclosure, risk retention, and prudential issues, needs to be completed.
7. Remember the costs involved
Policymakers should always consider costs along with benefits. Costs to originators and securitizers may be passed on and reflected in the cost or availability of credit.
8. Mitigate policy risk
Policymakers need to take steps to build the confidence of mortgage investors that policy will not unexpectedly shift in the future, at a cost to investors. In particular, policymakers should ensure that eminent domain is not used to seize performing mortgages from PLS trusts.
