With the whole market still unsure of when home prices will hit rock bottom, investors remain wary of the private-label RMBS market.
Alan Boyce, chief executive officer at Absalon, likened the return of the private-label market to the play Waiting for Godot, where two men anticipate the arrival of a titular character who never materializes.
Buyers are still skeptical about the worth of these securities because any further deterioration in home prices can result in the devaluation of their investments, said participants at American Securitization Forum’s (ASF) ASF 2012 being held in Vegas this week.
At what was coined as the “groundhog” panel at the conference called Future of U.S. Mortgage Finance, speakers looked at the state of U.S. housing and the private-label residential mortgage market.
Andrew Davidson, president of Andrew Davidson & Co. called housing the “unsolved problem of the crisis.”
In her presentation, Laurie Goodman, senior managing director at the Amherst Securities Group, pointed to the 32-month housing overhang as well as the housing doldrums due to a supply/demand imbalance. According to her presentation, for the next six years, there can potentially be 2 million of supply with only 1.2 million in demand, which means an excess of 800 million homes per year.
Saul Sanders, co-CEO at Shellpoint Partners, said that there are three factors hindering the private-label securities market: the lack of liquidity, the uncertainty over regulatory change and over dealing with the rating agencies.
In non-agency mortgages, for instance, the warehouse lines are very short and will only be for the most pristine mortgages. There is also no assurance of sale execution. “There is so little supply to find a price benchmark or to hedge your risk,” Sanders said.
Panelists said the problem lies with the parity of execution between the government and other liquidity sources.
The residential mortgages market is roughly $10 trillion in size, $6 trillion of which are government-backed. “You can’t stop that immediately,” said Luke Scolastico, senior vice president at Bank of America. However, a tipping point needs to be found.
When or even whether that will come about is in doubt. Private-label securities players are exiting the market because of legislation such as the Volcker rule and even Basel III, which has provisions detrimental to the mortgage servicing rights market.
Rating agency and investor requirements are also difficult to satisfy, making the qualified residential mortgage or QRM definition seem not that hard to comply with.