Private Capital Wants to Make Money. Period.

We keep hearing the same chorus week after week from politicians and regulators: we want private capital to return to the mortgage business. In a nutshell, they want private investors to play the role of Fannie Mae and Freddie Mac – that of buying and guaranteeing loans. Well, let me tell you something, folks: it's not going to happen anytime soon and here's why: Private investors (those not tied to Uncle Sam) like to make money. They want returns of at least 15% to 20%. That's the threshold in today's market. If it's not in that range, why bother? Private investors have made a killing in the stock market the past six months and may continue to do so by either going 'long' or 'short' stocks. But bonds? Please? Even Bill Gross and PIMCO got their head handed to them last year by shorting Treasuries (or betting against Treasuries.) Private investors will not enter the secondary mortgage market any time soon. Why should they? The Attorneys General, class action attorneys, consumer advocates, and bleeding hearts everywhere are still trying to wring as much money out of the mortgage industry as humanly possible – while shouting from the highest peaks: Why won't you loosen your loan standards? Talk about irony! But I will say this: private investors are returning to the mortgage business as owners of lending and servicing shops. Why? Because MSRs are super dirt cheap and you can enter the nonbank lending arena fairly inexpensively. But becoming a private sector Fannie/Freddie? Don't make me laugh. Redwood Trust, the only jumbo issuer out there, just posted a (small) loss for 4Q. It is admirably sticking to its jumbo knitting and hopes to make money eventually. And it probably will, but presently it must feel like they're walking through thick fog. Is that a gold mine or a cliff up ahead?