The notion that private capital is ready to return to housing finance in any meaningful way was all but dashed last week at the Mortgage Bankers Association’s National Secondary Market Conference in New York, where a pair of analysts, in effect, said, “Don’t hold your breath.”
Scott Simon, the head of PIMCO’s mortgage-backed securities team, told the conference the belief that the private-label MBS market is ready to rush in from the sidelines is nothing more than a pipe dream. Investors are not yet willing to swoop in and save the day, Simon said.
“Forget overseas investors, they won’t buy anything that’s not insured by Ginnie Mae, Fannie Mae or Freddie Mac. And neither will banks,” the PIMCO managing director told the conference.
Laurie Goodman, a senior managing director at the Amherst Securities Group, agreed.
Although the supply-demand function for housing finance “remains seriously broken,” Goodman warned, the market is “a ways away” from the return of private-label MBS. “It’s going to take awhile longer.”
If the two analysts are right, then a point made by keynote speaker Lewis Ranieri, the housing finance luminary who is credited with creating the mortgage-backed security some 30 years ago while working Salomon Brothers, was even more salient.
Ranieri, who now heads Ranieri Partners, warned that too many of his colleagues believe the future of the housing finance system won’t be decided by Congress until after the presidential election.
While that may be true of a slow-moving Congress, he said, the immediate fate of the capital markets has been turned over to regulators, who will publish an array of new regulations by November or soon thereafter.
“I truly believe the future of the industry will be decided by coming out this year,” he said. And the danger in that, he added, is that the rules will be based on the premise that borrowers won’t make their house payments rather that they will.
Ranieri doesn’t have any objections to a regulatory framework built on transparency, certainty or consumer choice. But he is worried that the lords of the housing manor will tighten standards so much that they will “eliminate virtually all private market options.”
Raj Date, deputy director of the Consumer Financial Protection Bureau, pledged once again to “find a common sense and analytically sound” middle ground between protection and compliance.
The bureau wants to minimize the burden on business and ensure that every segment of lending has sufficient investor appetite, Date told the conference.
“We want to encourage a competitive market that does what markets are supposed to do—calibrate risk and calibrate price,” he said. “We want to craft sensible rules that work for the market throughout the credit cycle.”
The CFPB director said there’s nothing wrong with risk. “It’s why financial markets exist. Risk is why you get paid. But nobody should get paid for taking risk that they can’t understand, they can’t rank, they can’t quantify or they can’t price...For too long, we lived in a mortgage marketplace where people were able to take bad risks and get paid anyway.”
But in his talk, Ranieri said he has been approached in recent weeks by two longtime successful mortgage bankers who want to sell their operations. “Their stated reason,” he said, “was regulatory uncertainty...and I fear an even greater exodus of community banks and mortgage bankers out of the business.”
During a press briefing, MBA president David Stevens sounded a similar alarm. “A significant correction is going on,” he told reporters. “Servicers are backing away, third-party originators are backing away, everybody’s backing away.”
In another convention speech, Richard Dorfman of the Securities Industry and Financial Market Association, said lawmakers and regulators are too busy looking backward to fix blame and restrain activities.
“There’s no vision, no sense of future. I’m not saying the past is best forgotten. But it’s an issue best not elevated to such importance and obsession that we fail to consider what comes next. Private capital will not come by mandate.”
