It may not be clear when the private-label securitized market will come back, but the developments that will likely shape it are coming into focus: the GSEs and the pending qualified residential mortgage (QRM) definition/risk retention regulation.
Not only the GSEs themselves but also their potential reform are factors, but in the case of the latter it is probably a more long-term one. As Securities Industry and Financial Markets Association (SIFMA) president and CEO Tim Ryan noted during a question-and-answer session at the group’s meeting last week, a year and a half or even two years from now GSE reform still could be a discussion topic because it is not “addressed fundamentally” in Dodd-Frank.
Nevertheless, we will be hearing more about it soon as the Treasury releases its proposal, for example. And regardless of the GSEs’ ultimate fate, the existing securitized market they now largely support still looks likely to be part of a blueprint for the future.
“There are a lot of aspects to the current [GSE] model that we think are very strong. The strongest of those is the ability to...pool, securitize and have a strong, vibrant, secondary market,” Randy Snook, an executive vice president at SIFMA, said in an interview. “That strong, vibrant, secondary market has created an asset class that investors want, that investors see as something that is very tradable, something that has a lot of liquidity and that has afforded the ability of the U.S. consumer to have a 30-year fixed-rate mortgage without a call penalty that’s extremely affordable.
“[It’s a] very liquid instrument, it’s an important benchmark also in the marketplace more broadly, so we have a standard setting that happens with it and a standard setting for trading other securities and other assets as well.”
That is not always how mortgage origination and securitization are done in other parts of the world, where they can be a much more variable rate model. When asked about this, Snook said the case for maintaining the 30-year FRM for securitization in the U.S. lies in balancing investor and consumer demand.
“The balance is making sure that you have an asset class that not only accomplishes consumer demand for home mortgages but the also provides a greater quality investable asset,” he said.
Going forward, how QRM is defined also “will help define what assets are more readily securitized and what assets are securitized with risk retention,” Snook noted.
However, he said at press time consensus remained elusive in this area.
While agreement may be elusive in that realm, in the big picture SIFMA looks at — which goes far beyond mortgages and related securities into financial services and across the globe — it does sound like there is a lot of consensus that folks do want new securitization in general to come back. And the inability to get it to has been a frustration.
Until truly “new” private-label securitization comes back to the mortgage market in the U.S., it may have to continue resecuritizing or private-placing much of its product.
And according to at least one rating agency, albeit one that has only a small slice of this business, credit risks in residential MBS resecuritizations continue to mount. Moody’s Investor Service believes that when properly structured a rescuritization bond could achieve a higher rating than the underlying RMBS, but it considers many it has seen to have significant credit concerns.
Resecuritizations turn low-rated RMBS into two new bonds in which cash is allocated first to a senior bond and losses go first to a junior bond.