Nearly 90% of all originated mortgages ended up in loan portfolios backed by Fannie Mae (FNM), Freddie Mac (FRE) or Ginnie Mae last year, leaving mortgage financing largely in the hands of the US government, according to a Deutsche Bank (DB) report on the 2010 outlook for mortgage-backed securities (MBS): Private residential mortgage-backed securitization recorded little activity in 2009, the report adds, which is a worry to both investors and policymakers within the government, as without it, “$6.7trn in today’s balances would either have to return to bank balance sheets or disappear over time,” writes MBS analyst Steven Abrahams, adding that “neither of those choices seems tenable.” Before the current crises, private securitization played a large part in mortgage origination funding (see chart below). Currently, policymakers are considering changes to the risk retention requirements to private-label securitization, which Deutsche Bank generally supports, though as it appears in legislation, the requirements represent a “clear, if not particularly efficient effort, to clean up some conflict-of-interest issues.” As part of its efforts to help reboot securitization, the American Securitization Forum (ASF), a trade body representing private securitization market, said the 5% skin in the game requirements, while well intentioned, may have unintended consequences. “ASF’s members are committed to restoring the availability and affordability of private credit to Main Street and are particularly concerned that the 5% ‘skin-in-the-game’ provision in the proposed rules will result in accounting and regulatory capital treatments for private securitizations that could significantly reduce the availability and affordability of private lending to consumers and small businesses over time,” said Tom Deutsch, executive director of the ASF. “Such unintended consequences could create even greater reliance on a costly taxpayer-backed system of mortgage credit extension that would not be subject to these proposed rules, such as the one currently in existence through the GSEs.” Write to Jacob Gaffney. Disclosure: the author holds no relevant investments.
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