Although GSE reforms could open up some additional conforming mortgage flow into the private label RMBS sector, there is still a very limited amount of mortgage origination to securitize.
The Obama administration is slated to make a proposal on GSE reform sometime this month. and securitization industry players expect that the most significant short-term impact for private label RMBS origination will be a reduction of the conforming loan limits.
The conforming loan limit determines the maximum size of a mortgage that the GSEs Fannie Mae and Freddie Mac can buy or guaranty. Each year, the government sets the maximum allowable loan size for a conforming mortgage, based on "typical" housing costs nationwide. In October, the U.S. Congress extended a provision that set the conforming loan limit to $729,750 for a single-family home through fiscal year 2011.
"It's likely that the Obama administration will move to slowly lower limits on conforming loans and the extent they must deal with a Republican House we will likely see some sort of deal to bring down limits to at least $625,000 from $729,000 today," said Paul Jablansky, senior consumer ABS and non-agency residential strategist at RBS Securities, at an ASF sunset seminar late last year.
Republicans are likely to push for nonconforming levels to come down as soon as possible to $625,000 from the current $729,750 for the single-family home. Ultimately, they would want to see levels reduced to the usual conforming limit at $417,000.
"It would take an affirmative act of Congress to extend the current conforming loan level limits beyond September and it's likely that Republican won't want to pass extension legislation given that they have already voiced concern about these higher loan limits," a market source said.
However, even with the prospect of more mortgage loans filtering through the private-label market, industry sources said that a key challenge for RMBS securitizations has been getting banks to securitize mortgage loans as opposed to holding onto those assets as investments.
"Deposit issues are at a relative all-time high. Until borrowers move away from savings and back into investing in mutual funds, as an example, banks will continue to have high deposits to use for funding," the market source said.