There sure has been a lot of regulatory and industry work on private-label residential mortgage-backed securities reform in the wake of the downturn, and a lot of concern about how excessive some of it is from the sell-side’s perspective. But the way one insurance company investor sees it, when it comes to the alignment of securities buyers’ interests with that of servicers and issuers, reform is still lacking in areas like second liens.
“Part of the reason that right now we don’t have the appetite for nonagency paper in any form from a new issue perspective...is we haven’t seen any reform [of that type] yet. We truly haven’t as investors,” Nancy Mueller Handal, a managing director at Metropolitan Life Insurance Co., told attendees at a recent American Securitization Forum meeting.
Her company does invest in existing nonagency RMBS, which constitute about 23% of its portfolio, and she said she does appreciate efforts to “get the pipes built to get a new issue market going.” But her company currently prefers agency MBS, which it considers “liquid,” whereas nonagency product is not.
Major MBS concerns that persist include undisclosed second liens and related servicer conflicts of interest with investors, she said. “I don’t think anything changes that besides some kind of regulation of second liens.”
Clearly the excessive leverage that hurt so many when home prices deflated during the downturn remains among key concerns that haunt the market. But as researcher Chris Flanagan noted, clearly there are reasons loan-to-value ratios cannot simply be reduced to remove the concern, especially with a still-soft economy and housing market. “You go to a 60% LTV and guess what? You won’t have to deal these problems. But very few people can afford a 40% downpayment,” he said. (Flanagan, who is head of U.S. mortgages and structured finance research at Bank of America, stressed he was speaking only as an analyst at the ASF meeting and not on behalf of the company.)
Many have protested the tightness of the proposed qualified residential mortgage definition that could determine when the sell-side can get exemptions from risk retention requirements as well as what they view as inordinate rulemaking in general. Some also say the latter is contributing to the market’s lack of progress. But Ryan Stark, a director at Deutsche Bank Securities, told the ASF meeting the rulemaking is essential in some respects. “There’s pretty much no one that’s not being sued...You need the rules to protect you,” he said. “It needs to be a little more black and white.” Currently, “almost nothing in this market is black and white,” he said, noting that the rules are needed to rebuild the market and will take time.
Speaking of things that will take time, there continue to be differing opinions on the question of how, when and whether Fannie Mae and Freddie Mac can be phased out or transformed.
“Most of us use agency MBS due to liquidity...so when people come in and say, 'oh, the entire market can go to private label and institutional investors want those mortgages [because of their yields]’ that’s just simply not true,” said Handal.
Peter J. Wallison, a financial policy expert from the American Enterprise Institute, argued that buyers who want to use agency MBS for liquidity purposes should be using Treasuries instead. While these buyers “like [agency MBS] because it’s a little bump over Treasuries,” he said he does not see why public policy should be focused on providing those buyers with that premium.
