New GSE Reform Plan Necessary, But It's Not Enough, Lenders Say

norden-peter071312.jpg

Mortgage bankers welcomed the Johnson-Crapo housing finance reform proposal as a start, but cautioned they had no illusions it will on its own bring private capital back to their industry.

Not only does the legislation need to be passed—a tall order by itself—but other things have to happen in the market to make investors comfortable.

For example, private-label securitizations are likely to languish until the yields come up 100 basis points, said Garry Cipponeri, senior vice president and director of capital markets for the Chase Home Finance unit of JPMorgan Chase & Co.

Hedge funds are interested in return first and foremost, Cipponeri said Wednesday at the Regional Conference of Mortgage Bankers Associations in Atlantic City, N.J. There is plenty of interest in subordinated tranches of MBS, but little interest in the higher-rated AAA tranches.

On the bright side, the Senate plan unveiled this week shows both parties realize there needs to be some government involvement with housing finance, but plenty of private capital in front, Cipponeri said.

The full faith and credit of the government has to be the backstop if there is to be a liquid mortgage-backed securities market, he said.

There is not a lot of private capital that wants to come into the residential space right now until GSE reform is completed, said Peter Norden, CEO of HomeBridge Financial Services Inc., Iselin, N.J., at the conference. What investor wants to compete against Fannie Mae or Freddie Mac? But Johnson-Crapo should start the ball rolling, he continued.

Regulatory uncertainty and conflicting rules are also holding back investment. But private capital will eventually realize it want to be in the housing finance market, Norden said.

While the Johnson-Crapo bill has the support of both sides of the aisle in the Senate, it will have tougher sledding in the House, where Rep. Jeb Hensarling, R-Texas, has introduced his own bill, noted E.J. Burke, chairman of the Mortgage Bankers Association and executive vice president of KeyBank Real Estate Capital, Cleveland. But the organization is "thrilled" with what Johnson-Crapo contains, he said at the show.

It is unlikely any action will be taken on housing finance reform until after the midterm elections in November.

There is already plenty of private capital in the housing finance business, but none of it is directly in the MBS side, Cipponeri said. Private capital is present in the risk-sharing deals with the GSEs. Banks are originating or purchasing jumbo loans for their own portfolios and they are even starting to move into the agency-eligible product.

They can offer a lower price for both the jumbo and agency-eligible loans as an alternative to the guarantee fees the GSEs are charging for the latter, he said.

Then there are the three new private mortgage insurance underwriters which have entered the market since the housing crisis: Essent, National MI and Arch MI (which is the CMG platform expanding to do business with all originators, not just credit unions).

So there is private capital going everywhere in housing finance, except directly into the MBS market, Cipponeri said.

Investors want transparency and confidence in the loans being sold in the secondary market, said Teresa Bryce Bazemore, president of Radian Guaranty Inc., Philadelphia. The mortgage insurer has noticed a shift in its business mix, to doing the underwriting on 40% of the loans it insures where before it used to delegate underwriting to originators on 95% of the loans. This shows that investors "want our seal of approval" before putting their money in, she says.

Investors need to have confidence in the system and that are not at risk of losing lots of money. Once that confidence is restored, the private label MBS market will make a strong return, said Stanley Middleman, president and CEO of Freedom Mortgage, based in Mount Laurel, N.J.

For reprint and licensing requests for this article, click here.
Originations Compliance Law and regulation Secondary markets
MORE FROM NATIONAL MORTGAGE NEWS