The qualified mortgage test and risk retention rules will cement Fannie Mae and Freddie Mac’s dominance in the secondary market, keeping the private-label business confined mainly to jumbo loans, according to a new report from FBR Capital Markets.
FBR predicts that the QM language—mandated under the Dodd-Frank Act—will lead to further standardization of mortgages and prevent “new entrants from eroding underwriting standards in an attempt to increase market share.”
As proposed, the risk retention rule (which has yet to be finalized) will lead investors to prefer loans securitized by Fannie and Freddie because the two are exempt from risk retention under Dodd-Frank.
This investor “preference, the guarantee on principal and interest on Fannie Mae and Freddie Mac securities, and the removal of subprime product features should make the return of meaningful private securitization extremely unlikely in our opinion,” FBR analysts write in their report, “Future of Housing & Mortgage Markets: Winners & Losers.”
FBR estimates that over the next five years residential production will range from $1.5 trillion to $2 trillion.
If jumbo loans comprise 10% of the market, then private issuers could securitize $150 billion to $200 billion in product annually. “Clearly, this is a viable market for a handful of players. However, it does not recreate the [private] securitization market of yesterday,” FBR notes.
Meanwhile, the vast majority of loans will wind up with guarantees from Fannie, Freddie and the Government National Mortgage Association which currently have a combined 90% market share.