CoreLogic, along with the Urban Institute recently hosted an interactive Capitol Hill panel event titled, Bringing Private Capital Back to the Mortgage Market. The panel featured candid discussion among participants from the government, nonprofit and private sectors. Panelists explored the technical and political challenges to be addressed before private capital can be “crowded in” to the mortgage securitization market. The focus of the discussion was on pricing, governance and servicing.
Moderated by Faith Schwartz, senior vice president of government solutions for CoreLogic, the panel included a brief overview of the current state of the housing industry and challenges in the market. As Schwartz noted, “Though the housing market is well on its way to recovery with foreclosures at their lowest point since before the crisis, government-related exemptions from new regulations, including temporary exemptions under the qualified mortgage rule and government securitization exemptions under the re-proposed qualified residential mortgage rule, have led to a lot of private sector uncertainty and an industry-wide question of how to get back to a more balanced system.”
Panelists included Paul Leonard, senior vice president of government affairs for the Financial Services Roundtable, Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute, Eric Kaplan managing director of mortgage finance for Shellpoint Partners LLS, Trez Moore, managing director of markets for Royal Bank of Scotland and John Vibert, managing director and portfolio manager for Blackrock Advisors.
Key points shared by panelists include:
Paul Leonard, Financial Services Roundtable:
►There is concern that uncertainty around representations and warranties, particularly with the GSEs, is one of the biggest obstacles in the current market, leaving a gray area, despite the end of the low-documentation or no documentation era.
►With the GSEs exempt from the proposed QRM rule, there is no incentive to securitize non-QRM loans, which is a barrier to bringing in private capital.
►The framework has already been laid, but lenders and originators want to see what the GSEs will do to add clarity around representations and warranties, which will influence the private securitization market.
►The market needs to see housing finance reform move forward, transitional issues addressed and more industry regulations worked out.
Laurie Goodman, the Urban Institute:
►The GSE-plus-FHA/VA share of the mortgage market is around 80 percent; this strongly suggests the need to attract more private capital moving forward.
►There are two alternative strategies that can accomplish this:
“The first option is to contract the government footprint, and incite more movement through private channels, by increasing guarantee fees and lowering loan limits to encourage banks to retain more loans in their portfolios and, hopefully, to generate more volume in private-label securities.”
“The second approach is to maintain the current level of engagement with the GSEs but lay off more of the credit risk through front- and back-end risk-sharing transactions or reinsurance.”
Eric Kaplan, Shellpoint Partners LLS:
►One of the biggest, but most important challenges is setting guidelines and protections to make sure the investor is buying what he thinks he’s buying, reestablishing an element of trust to the market.
►This has to be something issuers, investors, rating agencies, due diligence firms, trustees and brokers can all agree to, with solid best practices and user-friendly benchmarks.
►Progress is being made through collaborations like the Structured Finance Industry Group.
Trez Moore, Royal Bank of Scotland:
►Pricing is a primary driving force for the private label securities market.
►Currently, commercial banks are originating loans that could be held in their portfolio or placed into a private label securities deal. However, holding loans in their portfolio is far more economic, given where the price at which a private label securities deal can be executed.
►The return of the private label securities market is dependent on price execution that is comparable to the bank portfolio bid.
John Vibert, Blackrock Advisors:
►The role of trustees is too unclear and there is no one effectively serving as the investor’s advocate. This makes it difficult to commit investors’ capital.
►There is still no transparency in reporting on deals; documentation to investors has not really seen improvement; there continues to be inadequate accounting for fees or where the money goes; and the language around representations and warranties remains unclear.
►It is difficult to put capital back into a structure where you have undefined points that are so important.
At the conclusion, Goodman pointed out, “The most positive news is that policymakers are actively engaging the industry in a dialogue about reform.”