Speakers at information Management Network's ABS East who tackled the housing market harped on two topics hampering the comeback of private-label RMBS issuance — in particular the lack of a clear definition of a qualified residential mortgage (QRM).

QRMs are exempted from credit risk-retention requirements. Regulators for now have included only high quality mortgages in the definition, potentially discouraging lending to non-prime credits. Panelists also complained about the unfair advantage that Fannie Mae and Freddie Mastill enjoy over the private-label RMBS market since lenders can take advantage of the cheaper execution offered by the GSEs.

QRM, which has yet to be finalized, could end up being less restrictive than what the market initially thought it would be, said James Egan, a securitized product strategist at Morgan Stanley. But he added that as this mortgage type lacks a strict definition, lenders continue to originate only to borrowers with the most sterling credit.

And not everyone has 780 FICOs, said Damien Weldon, vice president of business development in the global capital markets division of CoreLogic. On the sidelines of ABS East, Weldon said that the key to speeding up private-label mortgage origination and, consequently, a healthy private-label RMBS market would be to cater to those borrowers who have good but not impeccable credit. This, he added, will “help unlock the market."

Speaking on one of the panels, Matt Tully, chief of staff for Congressman David Schweikert(R-Ariz.), said that in looking at QRM, there was a concern among members of the House Financial Services Committee regarding the debt-to-income and down payment requirements as the rule has been proposed. A 20% down payment raised the question of how affordable housing would be for first-time homebuyers, Tully added.

Schweikert himself, the conference keynote speaker, later asked the audience: “You really think in a QM or QRM world you can compete with Fannie and Freddie?”

A number of participants criticized what they see as the lopsided power of these government behemoths, which in the post-crisis era have accounted for roughly 95% of RMBS.

“What we need is a level playing field in terms of regulation and economics between private label and the GSEs,” said Stephen Kudenholdt, chair of the capital markets practice at SNR Denton. One suggestion he had for winding down the role of the GSEs: raising the loan-guarantee fees charged by these entities to “fair market value.”

But we still have the other 5% — kept alive primarily by REIT Redwood Trust. Another lifeline to the private-label RMBS might soon come from Shellpoint Partners, which in mid-October filed a shelf registration with the Securities and Exchange Commission. The company said in a press release that it planned to beef up its origination for quality borrowers who nonetheless fail to meet the standards of the GSEs. There was a good deal of buzz around this transaction at ABS East, not least because industry old hand Lewis Ranieri is chairman of Shellpoint’s board.

But even more activity from private-label issuers is not likely to make much of a dent in the government’s share of the market unless deliberate regulatory efforts are made to shift the economics of deal making away from Fannie and Freddie and toward the private-label market, participants said.

In Kudenholtz’s opinion, QRM should end up being similar to, or the same as, QM, which basically establishes nothing more than the ability of the borrower to pay. “The bigger the difference is between these definitions, the easier it will be for the government to perpetuate its dominance of the mortgage market,” he said. “They should be a lender of last resort, not a lender of first resort.” 

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