Does the Industry Still Need Private-Label Securitization?
When mortgage professionals talk about the private-label securitization market, they sound like residents of a disaster-stricken area wondering about the power. Life can't go on until it comes back.
But is that assumption true?
Practically, regulation and borrower appetite will determine whether the mortgage market still needs private-label securitization. Realistically, politics will play a role as well.
While growing since it ceased during the downturn, private-label securitization remains scarce. Government securitizations dominate, and proposed reform that involves scaling back public involvement is moving very slowly, in such a way that its ultimate outcome is unclear.
Also currently unclear is how risk retention requirements that affect the balance sheet treatment of securitization will take shape.
So far it appears that the parameters for the class of loans that will receive liability protection and exemption from securitization risk retention, the qualified residential mortgage definition, will be in line with the qualified mortgage rule that recently went to effect and serves a similar role for originators, protecting them from liability related to requirements that they determine borrowers' ability to repay loans.
Without a private-label securitization market, borrowers whose needs lie outside government agency lending standards and QM/QRM definitions would be limited to getting loans from depository lenders willing to put such risks on their balance sheets, and a private market that charges a relatively high premium for such mortgages.
Some industry experts question whether there's much underserved need outside the QM market.
The dollar volume of non-QM loans is limited, to at most $150 billion, and banks are holding those, leaving very few left over to be sold to private-label securitizers, according to Rob Chrisman, an associate with mortgage banking consultancy Stratmor Group and a former secondary market executive.
One private-label deal in the pipeline was ultimately dismantled in favor of a whole loan execution last year, and other loans originated on-balance sheet outside of the government agencies' guidelines have priced better than their government equivalents recently.
However, lenders say banks' interest in nonagency loans will prove fickle in the long run, and insufficient given borrower demand.
Other estimates for the size of the non-QM market are much larger and lenders face some disincentives when it comes to putting them on balance sheet, says John Robbins, a former lending executive and a founder of Mortgage Collaborative, a new cooperative industry group.
"There is a limit to the current capacity to warehouse, and portfolio, these loans," he says.
Recently updated Basel III global accounting standards that limit the amount of capital banks can hold in the form of servicing rights, driving many depositories to shed them, will have a similar effect on non-QM loans, according to Robbins.
The effect "will be as harsh, if not more harsh," Robbins says.
Securitization's main attraction for sellers in the past has been that it is an alternative to balance sheet lending, but Basel, and the proposed risk retention requirements that would force sellers to hold at least a portion of risk on their balance sheets when they securitize, compromise that.
Buyers' interest in private-label securitization also has been shaken by the bonds' weak performance during the downturn, but data and technology are in the works that will eventually make possible the loan-level transparency investors need to regain confidence, Robbins believes.
The market has gotten by with little private-label securitization but it has had some cost. It is pushing borrowers without access to affordable financing into apartment and single-family rentals, and giving investment buyers the upper hand. This effectively cuts the consumer out of investment in residential real estate, whereas securitization cut them in, Robbins says.
Private-label securitization has its challenges and whether it can help with these concerns depends on whether it can provide enough incentive to bond issuers, dealers and investors to make a liquid market within the context of regulatory and accounting reform.
It also is a question of whether there is enough of a borrower need for it. Robbins' opinion is that private-label securitization has left a gap in the market. Whether a new PLS can fill the gap remains a question, but if it fails to, Robbins believes something else has to take its place.
The United States houing market will have a tough time fully recovering without additional products, according to Anthony Hsieh, CEO of lender loanDepot. "Something has to develop" to fill that gap but the market "can't go over the edge" to the point where it begins making the kind of indiscriminate loans it made prior to the downturn, he says.
Finally, whether the industry needs private-label securitization to come back can depend on one's views about how involved the government should be in the mortgage market, and how exposed taxpayers should be to its risks.
"It is a political issue," said Mortgage Bankers Association president and CEO David Stevens, who advocates a blended approach where the government provides a guarantee for catastrophic risk but the private sector fulfills other functions.
And like all political issues, it will take time to resolve.
"You don't want the government controlling the secondary market," says Robbins, "but a lot has to happen before [the private-label market] returns to what we have seen in the past."
Kate Berry contributed to this story