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Treasury Adviser Urges Changes for Private-Label Securities

MAR 6, 2014 2:44pm ET
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Private-label mortgage securities issuers should act now to make their industry more standardized and transparent, the senior adviser to the U.S. Treasury on housing policy said.

Lack of trust between parties has caused the market for securities that aren’t backed by the U.S. to come to a “virtual standstill,” Michael Stegman said during a speech in New York today.

“The best time to do the heavy lifting required to restart the PLS market is when other channels provide more favorable execution,” Stegman said. “So that when the tide turns, the PLS market will be ready to intermediate between the originators of mortgage credit and those who want to invest in mortgage credit.”

While issuance of nonagency securities tied to new loans jumped to $13.4 billion last year from $3.5 billion in 2012, the sales collapsed after September, according to data compiled by Bloomberg. Less than $1 billion of the deals were completed from October through December, and less than $1 billion so far this year, the data show. PLS issuance peaked at $1.2 trillion in 2005 and again in 2006.

Banks’ demand for loans for their balance sheets and bond investors’ desire for higher yields after record defaults are helping to curb issuance along with a slump in new loan volume sparked by a plunge in refinancing amid higher interest rates.

Though standardization is desirable, the U.S. shouldn’t mandate it, Stegman said.

“We are not advocating a one-size-fits-all solution,” he said. “We recognize that mandating a single standard may discourage innovation down the road.”

Still, Stegman said, “we would envision a large number of market participants choosing to use it, to build confidence and liquidity, and only using bespoke terms when necessary.”

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