Can Lenders Live with a Government-Dominated Secondary Market?
Four years ago, David Stevens, then the Federal Housing Administration commissioner, told the Mortgage Bankers Associationís secondary market conference that the governmentís 90% market share was a sign of a "sick system."
The patient is still recovering, slowly.
"It still remains today that private capital has a long way to go," Stevens, now the chief executive of the Washington trade group, told attendees at the annual secondary show this week in New York. The government still controls about 85% of the market, he says.
Washington had to step in and take over during the last economic downturn, he said. Otherwise there would be no housing market to speak of. But government market share needs to shrink. Efforts to that end, such as legislation to replace Fannie Mae and Freddie Mac, continue to move too slowly given the government-sponsored enterprises' 0% capital cushion, Stevens said.
Current government lending parameters, in some cases with additional overlays lenders add to mitigate their own risk of repurchase, leave some borrowers out. The government-sponsored enterprises, at the direction of the Federal Housing Finance Agency under new director Mel Watt, are rewriting the standards that define lenders' liability in hopes of broadening lending. In the meantime the average credit score for Washington-based Fannie Mae is 741, while for Americans in general it is 700, according to Stevens.
There is some hope that an increased private market could provide increased liquidity to underserved borrower segments with affordability challenges. But with key investors still gun-shy, the securitized private-label product to date has been conservatively underwritten and aimed at higher income borrowers who want large loans and are likelier to pay.
If jumbo securities issuance became more regular it could pave the way for securitization of a broader range of asset types outside government parameters with increased levels of risk. Interestingly, what's been holding back this use of private-label securitization is not a lack of buyers in the market willing to take on risk, says Tom Wind, an executive vice president and the head of home lending at EverBank. "There are a lot of people who want to take on credit risk," he says. Rather, buyers of the highest-rated portions of deals remain the most gun-shy in the wake of massive underperformance by the 2005-2007 crops of securities. The market needs these buyers on board in order for issuers to structure an economically-attractive private-label securitization.
Even if those buyers were more active, the nonagency securitized market has stalled since rates rose in reaction to the Federal Reserve's tapering of its rate-lowering stimulus. This development, combined with banks' increased appetite for competing whole loan sales as loan volumes ebbed, interrupted and slowed what had been a growing nonagency securitization market last year.
At least whole loan sales in general are active in the current secondary market as more players turn to correspondent lending to replace lost loan volume in what can be a more-cost effective way. But the lack of nonagency securitization leaves the nonagency market without a more regular source of efficient funding.
There remains some interest in non-agency securitization but it continues to appear more long-term than immediate. Freedom Mortgage Corp. Chief Executive Stan Middleman is interested in getting involved in nonagency securitization but not until the market is more established, something he believes could occur sooner than some think.
"There is enough smoke that there has got to be a fire somewhere," says Middleman.
"We don't want to be the trailblazer," he adds. "Someone else will be the spark for that distribution channel."
Wind says EverBank has no immediate plans for more jumbo securitization but would return to that market if it were to become an attractive execution strategy. So long as needed GSE reform eventually occurs, if the market remains status quo for a little while it may not completely be a bad thing, he says.
"I get the sense we're going to keep things steady, and that's what we need," he says, noting that periods of stability can be encouraging to investors.
However, he thinks the agencies that dominate the mortgage business can't just continue to operate under the government's conservatorship as they have for too long.
"Conservatorship is no way to run the mortgage business," Wind says.