Are FHLBs the Answer to Jump-Starting Securitizers?
Private-label security issuance may be scarce these days, but there seems to be an endless supply of ideas on how to revive the market — from the much-discussed to the novel.
Many of the industry letters providing input to the Treasury Department on jump-starting the PLS sphere endorsed somewhat obvious steps, such as a more appealing regulatory environment or less dominance by Fannie Mae and Freddie Mac. But some commenters threw newer options into the pot.
Perhaps the most original idea came in the proposal from Redwood Trust, which noted the Federal Home Loan Bank System could be an "anchor buyer" of private-label securities to attract broader participation.
"We suggest allowing the FHLBs to acquire and hold the highest rated, highest quality triple-A securities," which "would decrease volatility and reduce the bid/ask spread on any given day," executives from the company said in a letter to Treasury.
Other proposed solutions include the so-called "RMBS 3.0", a new comprehensive set of PLS standards developed by the Structured Finance Industry Group. Another letter even focused on expanding covered bonds as an alternative to securitization.
"Many of the attributes" needed in "a private funding channel could be met by implementing a framework for covered bonds in the United States," attorneys at Morrison & Foerster LLP wrote in an Aug. 8 letter.
Treasury requested comment in June on strategies for developing a "responsible" PLS market, asking for input on what obstacles are holding back securitization, how to address those hurdles, and the appropriate roles for the government and the private sector in the market's future, among other issues.
Responses, which were due Aug. 8, ran the gamut. Ideas include regulators speeding up completion of risk retention standards and other rules related to securitization in order to improve clarity for the market. In some cases, commenters noted, current regulations could be eased to increase investor appetite. Policymakers were also urged to make progress on developing an heir to the government-backed housing finance model dominated by Fannie and Freddie.
"An unsettled regulatory environment, potential changes in the very structure of the housing finance system and a lack of trust between counterparties are hindering the growth of the PLS market," wrote John Dalton, president of the Financial Services Roundtable's Housing Policy Council, in an Aug. 8 letter. "An expanded PLS market is unlikely until these matters are resolved."
But clearing up policy uncertainties appears to be only half the battle.
Redwood Trust, which along with its comment letter submitted a "Guide to Reviving the Private Label Securitization Market," called for certain PLS structural changes before investors will participate in the market again. These range from changes in representations and warranties, as well as in fiduciary duties of trustees.
Even after those structural issues are resolved, Redwood — a real estate investment trust that has securitized nearly $9.2 billion in prime jumbo loans since mid-2010 — said investors may still sit on the sidelines of a market that has gone largely dormant since the crisis.
"The Catch-22 is that we can't get to a healthy and liquid state while both investors and issuers remain on the sidelines, waiting until the market is healthy and liquid," Redwood said.
The company noted that the "PLS market lost three very large anchor investors" when Fannie, Freddie and the FHLBs were rid of their ability "to acquire new securities for their portfolios." While Redwood acknowledged there is little "political appetite" for creating another government program for the housing market, the company said allowing a government-backed entity such as the FHLBs to help spur investor activity "would be an effective solution."
"Once the structural issues are resolved to the satisfaction of AAA investors, if there still is no relative activity in the RMBS market, what we are suggesting is the need for an anchor buyer for a period of time," said Redwood spokesman Mike McMahon in an interview.
It is still too early to tell if such an idea has legs. Some observers say a role for FHLB system could be considered, but carries new risks. The Home Loan banks themselves, meanwhile, have not expressed interest in getting involved.
"It is an interesting idea that deserves serious thought," Karen Shaw Petrou, managing partner at Federal Financial Analytics, said in an interview.
But Petrou said such a move could be viewed as just another federal guarantee for the housing finance system and require the FHLB system to have a much more prominent role in the housing market than it currently has.
"It raises a lot of questions, since we've been there, done that, with the implicit federal guarantees on residential mortgages," she said. "If the FHLBank System became the anchor or buyer of last resort, they would have to set the credit standards or be subject to the credit risk set by lenders and issuers."
The Council of Federal Home Loan Banks, a Washington-based group representing the system, said the banks have not really looked at the idea.
"We have enormous respect for Redwood Trust and its significant, potential role in the recovery of the private-label securities market," council spokesman David Jeffers said in an interview. "As for their suggestion of the FHLBanks becoming a foundational investor in a recovering market for PLMBS, we would have to say simply: The activity suggested by Redwood is something that the FHLBanks and their members are not considering."
Redwood Trust was not the only entity proposing broad steps.
The SFIG pitched the organization's RMBS 3.0 plan, which involves collaboration from 200 individuals across the securitization industry to develop solutions to key obstacles and promote standardization in PLS practices and procedures.
Yet the group said some level of government involvement may be necessary.
"SFIG believes that any effort to solve the structural issues in the PLS market must be an industry-led effort with government assistance on key issues of contention," Richard Johns, the group's executive director, said in an Aug. 11 comment letter.
David Stevens, the president and chief executive of the Mortgage Bankers Association, said the holdup in reforming the federally-backed system now dominated by the government-sponsored enterprises is also delaying advancement for the private-label market.
"The lack of clarity regarding housing finance reform and the future role of the GSEs remains a roadblock" to the revival of a robust PLS market, Stevens wrote in an Aug. 5 comment letter. This uncertainty has "led many potential issuers to hold back from investing in order to avoid having to compete against government-backed institutions," he said.