A trio of industry executives attending the Mortgage Bankers Association’s National Secondary Market Conference in New York weighed in recently on what they think the building blocks needed for a true return of a nonconforming secondary market are slowly shaping up to be.
In this section of a roundtable discussion organized by this publication, the consensus seems to be that, among other things, shadow inventory needs to clear and market indicators like job and property value stability have to fall into place.
Also regulations affecting these concerns still need to firm up. These include proposed quality benchmarks such as the definition of “qualified mortgage” and “qualified residential mortgage” under the Dodd-Frank Act.
While many of these factors have lingered for years, at least one executive participating in the panel said he is sticking with an off-the-cuff prediction he made in 2009 that there could be light at the end of the tunnel and a recovery by 2014. He noted that Federal Reserve chairman Ben Bernanke also has said recovery could occur around that time.
Another roundtable discussion participant believes home price stability will in particular be key in the secondary market because of a continuing depreciation scenario’s effect on agency models that determine credit enhancement and thus the amount of profit securitizers or would-be securitizers can make on a deal.
Then there is the continuing question of sideline money, which the third participant confirms remains very interested but held back by the lack of a stable “environment” to do business in.
Participants in the discussion were David Kittle, senior director of industry relations at IMARC, Lenders One chief executive officer Jeff McGuiness, and Alex Santos, president and managing director of Digital Risk.
The three are notable in that Kittle is a longtime industry veteran as well as a former lender and Mortgage Bankers Association official, McGuiness just recently assumed the responsibility for leading a lender cooperative that aims to pool the resources and provide economies of scale to a group of relatively smaller market participants, and Santos has launched an effort to establish an industry best practices group.
In this excerpt of their remarks, they answered questions posed by National Mortgage News group editorial director and associate publisher Mark Fogarty, senior housing correspondent Lew Sichelman, associate editor Bradley Finkelstein, and vice president and group publisher Tim Murphy. NMN managing editor Bonnie Sinnock organized the roundtable.
Other portions of the discussion may appear in other affiliated print or online publications in the SourceMedia mortgage group.
FOGARTY: I’m going to get started with a question I’ve asked at the last four of these meetings, and that is: When do you guys think we’ll see the return of a robust nonconforming market?
KITTLE: I’ll go ahead and take that shot...and give the same answer I gave in July of 2009 to the House Financial Services I predicted then the third quarter of 2014. I’ll stick with that and I hope it happens.
SICHELMAN: Tell us why.
KITTLE: Because I don’t think we’re at the bottom of values. We continue to create false bottoms with more and more programs. I think that, until you let people fail the proper way, you’ll never get the values. And until we solve for real values and we solve for jobs, we will not solve our issues that we have at this point.
FOGARTY: So foreclosures, shadow inventory, that all needs to be worked through first...
KITTLE: It does.
FOGARTY: ...to get down to the bottom of values.
KITTLE: And add to that the uncertainty with CFPB that we’re talking about at this conference, it’s real. Everybody is afraid of what they don’t know. So if you add exactly what you said, Mark, plus the uncertainty, that is exactly what it is. People also want jobs, and real unemployment isn’t 8.1%, it’s much higher than that because people are leaving the workforce. Therefore our industry can’t rebound like it should until people have good, solid incomes.
FINKELSTEIN: Where does something like QM fit into all this?
SANTOS: The reason it’s important, at least in my view, for housing prices to stabilize is because the rating agencies are running scenarios showing home price depreciation that makes it impossible for securitizers—it’s not impossible, we’re seeing regular deals—but it’s difficult for securitizers to make a profit. And if Obama were to be re-elected he may have some issues to tackle, have to take some corrective actions for Dodd-Frank. (To Kittle) The third quarter of 2014 is your prediction?
KITTLE: I’m not smart enough to make that prediction. It was an off-the–cuff question and that’s the answer I gave in 2009. Luckily...Bernanke said in the first quarter this year that he thought the economy would be back toward the end of 2014. So there’s nothing like having somebody back you up when you don’t know what you’re talking about.
FOGARTY: That’s right.
MCGUINESS: I would concur with both of the previous statements, although I might reverse them in terms of the priority. We do currently have, and we’ve heard time and time again, about the sideline money, the money that’s prepared to step into this market and I think all of the factors that were previously stated are important. But by far and away the factors that we hear the most are the ones around the ambiguity around the prevailing regulatory environment. So when you couple the regulatory environment along with unknown future quality definitions of a loan, you’re securitizing an asset that you don’t know how that’s going to rate out in the future. And that holds people back from wanting to take that leap.
SICHELMAN: To play off of what you just said...It’s been said here by more than two speakers that money on the sidelines is wishful thinking, that it’s not there, and it’s not going to come back any time soon. So, what does that tell you?...Private money’s not ready to find the housing market.
MCGUINESS: The private money is ready. They can’t find the environment to participate and that environment is around known factors and the important factors are unknown around the quality components of a loan and all of the variables that will come into play as these regulations get settled out.
FOGARTY: So QM, QRM...all that stuff needs to be played out and everybody needs to be familiar with what that is before it opens up?
SICHELMAN: In that case it’s going to later rather than sooner.
FOGARTY: It’s going to be a long time.
MURPHY: How much do you think loan or risk valuation comes into it? When I go around the exhibit hall I see more quality control people than I’ve ever seen before. And I think that’s an offshoot. Before, as long as you got a triple-A rating, you knew you were good. You could sell... You had plenty of buyers. I think now a lot of investors don’t put as much credence in that. And they’re saying, “Hey, we’ve got to do our own due diligence and they’re bringing that risk valuation in-house. Do you think...that’s going to play into how fast or whether or not private capital comes back, their ability to quantify what it is they’re actually buying vs. relying on what the rating agencies say?
MCGUINESS: I’ll take that. Walking around the exhibit hall, same thought. While there is a lot of concentration on quality—and I start with the notion to suggest that this industry thought we had quality control at a different point in time and we learned otherwise...I think, regardless of how much better we are at it and how much more focused we are on it, we still have an unknown...did we get it right? And we won’t know that for years to come. So I think even as you see some of the sideline money start to enter, it will still have...in mind...I know we’re putting more focus on it, I know there are more tools and equipment around to administer it, but did we get it right? Did we get all of the variables involved in making a good decision and securitizing a good loan? Did we get it right this time?
KITTLE: I’d like to add something on top of that. I agree with most of what he said. Quality control is now an obligation. It’s not this thing that we had to do before, that we did, that we didn’t pay a whole lot of attention to. No. 1, we’re making, and we have for the last couple of years been making the best loans we’ve made in 15 years. No. 2, the uncertainty: How did I do with my quality control when I still don’t know what the rules are, the CFPB and Dodd-Frank? So the uncertainty continues. If your data is good and you’re collecting good metrics...you can deliver an excellent product into the marketplace and into the MBS...In order to bring the mortgage-backed securities market back...Five, six years ago, the rating agencies had no credibility based on what they rated before. If you want to bring it back other than Redwood. Good for Redwood, but it’s 60/70 LTV 750-plus credit score jumbo loans...In order to bring that normal market back, you’ve got to switch the way the mortgage-backed securities market works. And the market should be much like buying a house. Securitizers say, “Here’s what my security’s worth. What needs to happen is somebody’s [got to look at] the security and back up what they evaluate, and say, “75% of this is worth 102 your price, 20% of it’s worth 101 and the rest of it’s not worth anything” and then the seller makes the offer. Because when you buy a house today...get an appraisal, you don’t let the seller tell you what the house is worth, as the buyer you come and say, “This is what I offer and back it up with an appraised value. So you get real credibility and security and then private capital’s going to come back into the market.
SANTOS: About good data, today we called for an industry task force to settle on what QC is. In the securitizations that we’ve worked on, it’s been very challenging to interpret the guidelines that the rating agencies have put forth and that leads to a significant amount of ambiguity. It’s important for everyone in the industry to get together and make standards around...practices and make those practices transparent to the investor so that they know what’s happening. It’s very similar in the accounting industry...standards. Professional accountants adhere to those and they provide transparency.
FOGARTY: Do we need a new ratings model? The agencies did a really miserable job during the subprime crisis. Why would an investor be comfortable with their ratings?
KITTLE: We don’t have any investors available to buy mortgage-backed securities. It almost answers the question. They’re not comfortable because they have no credibility from before, so we have to have a new model. I’m going to suggest...I’ll say again what I said before. I’m buying a security, I’ll let you know what it’s worth on my evaluation and here’s the price I’m going to pay and you go in and...
FOGARTY: ...negotiate.
MCGUINESS: I think you may see some of the private aggregators try to emulate a model where they are putting their own rating out. They’ll try to create an environment where there’s transparency about their rating processes.
