The market for private label residential mortgage bonds hasn't come to a complete halt, but the few deals that are being done are so small as to be barely relevant. So how do you transition RMBS 2.0 to a deeper and more liquid private label market?
Panelists speaking at the ABS East's general session on the state of U.S. funding had some novel ideas. Michael Stegman, counselor to the Secretary of the Treasury for housing finance policy, said Treasury has made restarting the private label market a priority, and it wants to compliment the work that the securitization industry and other regulators are doing.
“We’ve worked on a several step initiative that doesn’t look at just what is wrong but that creates some interesting, out-of-the-box solutions,” he said.
For example Stegman said that Treasury is working on an exercise with Kroll Bond Rating Agency, Moody’s Investors Service, Standard & Poor's, Fitch Ratings and Morningstar to bring more transparency to the market. The rating agencies will provide insight on how they would rate a private label security based on the dynamics created by Freddie Mac’s STACR series of risk retention deals.
The exercise would give the market some perspective on how the five rating agencies would evaluate risk retention on similar pool but as a pure non-agency private label security, without the involvement of a government sponsored agency.
Stegman believes that information on what loss severity would look across different pools of assets would give issuers more room to wriggle away from the pristine credit quality of today's transitions. This kind of information could also help them achieve the critical mass needed to create better liquidity for the asset class. The rating agencies will have the result ready by Oct. 20.
The next step would be to a benchmark-size transaction that would cause institutional investors “to take notice,” said Fred Matera managing director Redwood Trust. “The problem now is that the market is small so it stays small," he said. “Something big would get everyone’s attention and it creates pressure to participate, similar to the experience Freddie Mac has had with its risk retention deals.”