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May 9, 2008

Rating the Retreat

Standard & Poor's Ratings Services' decision no longer to rate closed-end second loans or securities is another indication of a mortgage business in full retreat. Lenders are having trouble lending, Wall Street is in full retreat from securitizing (at least on the subprime side), and now a ratings agency is retreating from rating a whole product line.

We don't know if Moody's and Fitch will follow suit, but we don't want to single out S&P, because all the ratings agencies have done a miserable job on the subprime side, blithely certifying thousands of security tranches as creditworthy in recent years, tranches they are now quickly downgrading by the thousands.

When will the mortgage retreat end? Probably not until next year, but the true leaders in the industry will turn their horses around and start gaining ground before then.

It's instructive to remember the aftermath of the savings-and-loan debacle 20 years ago. True, the thrift niche suffered a thorough bloodletting and lost its place as the

The value (and necessity) of government backstopping of the mortgage business is underlined by the Mortgage Bankers Association's recent 10-point agenda for the government to help restore the badly damaged industry.

premier source of mortgage finance. But a healthy subset of the industry was not destroyed, and remains today as a viable part of the mortgage business.

Back then the government chartered the Resolution Trust Corp. to dispose of assets from savings and loans gone bad. The RTC did a decent job under very trying circumstances. No one likes the government in the middle of their business, but the RTC was useful in a couple of areas. One, it set prices on assets that some thought were worthless (junk bonds, for instance) so that market forces could resume their normal functions. And, it packaged so many commercial mortgage assets into securities that the CMBS market as we know it today got a welcome jump-start.

The value (and necessity) of government backstopping of the mortgage business is underlined by the Mortgage Bankers Association's recent 10-point agenda for the government to help restore the badly damaged industry.

MBA broke its 10 agenda points down to three main areas: stabilizing the market, assisting distressed borrowers and renters, and preventing future problems.
Keeping distressed borrowers in their homes, and consequently keeping those homes out of the foreclosure market and depressing sale prices even further, seems to many a key item. You can argue that dramatically falling prices should be allowed to fall as they will, because that will encourage sales when they've fallen to reasonable levels. But if liquidity pressure means there is trouble to get money to lend with at any price, then stopping the freefall seems the proper thing for the government to do.

However, the mortgage industry should not expect government intervention to come without a cost. Regulation and legislation is sure to follow, and the business is sure not to like a lot of it.