Some key regulatory issues still need to be addressed in order for private-label mortgage-backed securities to make a comeback.
“It has been nearly impossible to revive the private securitization market because of a lack of decisions on qualified residential mortgage rules,” said Tim Ryan, president and chief executive officer, Securities Industry and Financial Markets Association, in a speech written for the group’s annual meeting in New York Tuesday.
“Regulators have repeatedly said they want to spur the return of private capital to residential finance, reducing the virtually total dependence now on taxpayer-backed securitization. But, the pending risk-retention rules will make this, at best, difficult, especially taking the new capital and liquidity rules into account,” said Karen Shaw Petrou, managing partner, Federal Financial Analytics Inc. in another speech. “If proprietary trading in agency debt and MBS is not protected in the Volcker Rule, this will not only adversely affect hedging, but also the broader market liquidity necessary for there to be a TBA market,” she said.
But as SIFMA chair Chet Helck’s speech suggests, regulation is only part of the equation, and whether the private label MBS market does eventually stage a full-fledged comeback depends ultimately on how the industry sizes up risks and rewards in that area.
“Taking risks, whether it is through buying into an emerging market ETF, or extending a loan to a small business, or underwriting a mortgage, is what our industry does. At its heart, taking risk is our business,” Helck said. “But we, as leaders within each or our organizations, have to know what we’re investing in, know what we’re risking. Regulators will define the end parameters, but at the end of the day, each of us is ultimately responsible for ensuring we regularly review our practices, understand the risks we’re taking and manage those risks effectively. “