Several provisions in the comprehensive housing finance reform bill introduced by US Senators Tim Johnson and Mike Crapo would help spur issuance in the private-label residential mortgage-backed securities (RMBS) according to a new report by Moody’s Investors Service. Under the framework proposed in Johnson-Crapo, fewer residential mortgage loans would be eligible for inclusion in government-guaranteed securities because of changes in criteria establishing which securitizations can receive government guarantees.
“Under the bill, a new agency, the Federal Mortgage Insurance Corporation (FMIC) would provide a government backstop for eligible mortgage pools that have secured a private first loss piece of 10 percent through FMIC-approved risk-sharing mechanisms,” says Moody’s Vice President Sang Shin. “Loans would only be eligible for the FMIC backstop if they meet the CFPB’s Qualified Mortgage (QM) standards, among other requirements.”
The new requirements would be more stringent than the GSEs’ current eligibility criteria, which do not mandate that loans meet QM standards to be eligible for securitization.
More issuance would likely result as well, both in the private-label and government-guaranteed securitization markets from the introduction of a common securitization platform, as outlined under the legislation.
According to Moody’s Sang, more issuance could happen, “If the new system gives investors added confidence in the securitization market as a result of increased transparency and standardization and encourages originators or aggregators that had been on the sidelines to participate in the secondary securitization market. “
Several factors could, however, partially offset this growth in the initial transition period of housing reform, including investor uncertainty regarding the wind down of the GSEs and its impact on mortgage rates as well as the bill’s provision keeping the existing conforming mortgage loan balance requirements.
“The conforming loan provision is a shift from the Obama administration’s stance and previous housing reform proposals such as the bill introduced last year by Sens. Corker and Warner,” said Sang. “Maintaining the existing maximum conforming loan balance would limit the potential increase in private-label RMBS issuance.”
