Lenders and investors at this week’s secondary market conference in New York were interested in a question that’s been on target for at least the past three years: Where is the nonconforming secondary market? When will it show up again? When should mortgage packagers start their engines?
Until the private sector moves back into the secondary market, the government takeover of the mortgage industry will remain in place. And while Freddie Mac, Fannie Mae and Ginnie Mae deserve credit for keeping the mortgage industry open during a time where it could well have cratered, the GSEs have bled much red ink and the Federal Housing Administration is trying to downshift to avoid insolvency.
Signs of life discernible from the Mortgage Bankers Association’s meeting are most likely to come from the jumbo sector or the distressed asset sector. Jumbo loans are nonconforming but are not usually subprime, an important distinction. One firm, Redwood Trust, pioneered the return to jumbo MBS (a few others have followed, and anecdotally there have been whole loan sales as well) and has just come out with an optimistic view of the niche.
The real estate investment trust said it is buying from a network of 22 sellers and hopes to see that bump up to 40 by the end of this year and $2 billion in product.
It has issued two JMBS this year, for $744 million, and plans another one this quarter or next.
Not everything is rosy for the REIT. It cited governmental involvement in mortgage banking and competition from banks bidding for jumbos.
But if Redwood can earn $30 million in the first quarter, as it has just announced, it may be time for jumbo packagers to start or restart their engines.
As for distressed, there has been one nonperforming MBS to date, and you have to assume more to come, with the huge volume of distressed assets knocking around the mortgage industry.
The next question facing the business is, how to replace the volume that FHA will not do in order to keep its reserves from being depleted? And the answer is a true nonconforming market, one that reaches down to borrowers with lower FICO scores who can’t get financing from any of the government agencies.
One piece of advice—don’t call this nonconforming lending B/C or subprime! And do tighten up the underwriting and due diligence from last time! Maybe call them private mortgages, to distinguish them from government mortgages.
After that, the only worry is what interest rates will do, since the vast majority of mortgages remains refinancings.
