Fannie Mae-No Politics (FNMA)

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Private Mortgage-Bond Market Dead or Dormant?

It’s been nearly seven years since the market for so-called private-label mortgage bonds, or those that aren’t backed by government-related entities, dried up. For years, government policy makers and financiers have speculated over when those markets might meaningfully revive.

But given the weak issuance of such private mortgage-backed securities since the financial crisis deepened, there’s a good case to be made that that market is dead, said Joseph Tracy, a senior adviser at the New York Federal Reserve Bank, at a conference sponsored by Zillow last week in Washington.

Lawmakers and U.S. officials in recent years have suggested that limiting the reach of mortgage companies Fannie Mae and Freddie Mac , both by restricting the firms to purchasing smaller mortgages and raising the fees that the companies charge lenders, might help “crowd-in” private investment to the mortgage-bond market.

These markets may sound obscure but they have served in the past as a key source of financing for U.S. homeowners, particularly for borrowers seeking loans that don’t conform to the standards of Fannie, Freddie or government agencies, which generally can’t guarantee loans that exceed $417,000. (Select high cost markets, such as San Francisco and New York, have ceilings as high as $625,500.)

More than $1 trillion in private-label mortgage-backed securities were issued by Wall Street firms in 2005 and 2006, but the market imploded in late 2007. In 2010 and 2011, a handful of deals came to market, consisting entirely of “jumbo” mortgages that are too large for government backing. Post-crash issuance hit a high–relatively speaking–last year of around $20 billion, according to data tracked by J.P. Morgan Chase & Co., but dropped off after mortgage rates jumped. Securities firms have issued around $2.7 billion so far this year.

Treasury Secretary Jacob Lew said last month that the Obama administration would convene a task force in a bid to coerce private-sector players to agree to certain standards that might make investors more confident in the rules of the road going forward.

Mr. Tracy said that more work needs to be done to repair investor confidence in these mortgage securities, particularly the role of credit-rating firms like Moody’s Investors Service or Standard & Poor’s Ratings Services. Their ratings, which investors relied heavily upon during the housing boom, proved to be wildly optimistic. And some investors have questioned the role of the ratings firms, which received more business during the bubble if they provided the ratings that Wall Street firms were looking for.

“I think the trust that that investor group has with the whole rating process was completely destroyed in the bust,” he said. Until a new model develops by which investors can have confidence in ratings, “I don’t see that market coming back,” Mr. Tracy said. “I’m more of a mind that it’s dead than dormant.” Mr. Tracy said he was offering his own views and not those of the New York Fed.
http://craiggroom.com/2014/07/28/is-the-private-mortgage-bond-market-dead-or-dormant-3/