With just $13-odd billion of issuance in 2013, private label residential mortgage backed securities remain a tiny niche of the $1.7 trillion market for housing finance. Participants at an ABS Vegas 2014 panel struggled to explain how this market could become relevant to a broader range of U.S. consumers, although they took pains to sound optimistic.
“Right now we hear institutional investor clients refer to private label as a boutique product,” said Philip Thigpen, a director at PricewaterhouseCoopers. With the Mortgage Bankers Association forecasting a drop in total originations this year to $1.2 trillion, he said, that might suggest issuance of private label RMBS will drop as well.
Nevertheless, Thigpen said he is “bullish” if only because of changes in the conforming loan market: lower limits on the size of loans that can be insured by Fannie Mae and Freddie Mac will potentially leave more prime quality loans to be securitized in private label transactions.
Michael Dryden, a managing director at Credit Suisse, said the development of other products that provide some exposure to the housing market would benefit private label RMBS as well. He pointed to bonds sold by Fannie Mae and Freddie Mac that are linked to the credit risk in mortgages that they insure. “The more risks that get sold by GSEs to help foster participation in the market, investors feel more comfortable take risk,” he said. It creates incremental liquidity, which will further transactions through non-agency market. We’ll see how different price points play.”
Eric Kaplan, managing director at Shellpoint Partners, said investors need to know that they are protected before they will return to the private label market in greater numbers. “Many investors are still on the sidelines, many because of standardization,” he said. “They got burned reps and warranties were not identified or pursued, service losses were not recovered.”
Kaplan heads a Structured Finance Industry Group committee that has been developing standards for representations and warranties, due diligence and trustee responsibilities. He said that standards developed by another trade group, the American Securitization Forum, have not had the desired effect because “when we hit the go’ button, everyone went their separate ways.
The new effort, dubbed “RMBS 3.0,” aims to establish best practices across a number of approaches.