The big question on everyone’s mind at the Mortgage Bankers Association’s National Secondary Market Conference in New York held this week was, when will we see a thriving nonconforming secondary again?

Answer? No one’s really sure. The market has seen two Jumbo MBS in the last four years (both by Redwood Trust of California) and some Jumbo and nonperforming loan whole sales. Not a very robust or liquid environment.

One way that a new nonconforming MBS market may differ from its predecessor may well be in many more unrated securities. The current rating agencies performed horrifically during the mortgage boom. Why should investors ever trust what they say again?

Another big factor is the role of Fannie Mae and Freddie Mac. The nonconforming market will need to sort itself out around what the conforming market looks like. But what will that be? The government clearly doesn’t know what to do with these two behemoths, and they are starting to show signs of profitability again. Some at the conference speculated that they may survive after all.

Laurie Goodman, senior managing director at Amherst Securities Group, told the meeting she thinks there could be a good bank/bad bank structure for the GSEs that would allow them to continue. She doesn’t think a new structure for Fannie and Freddie can be implemented before 2017. That’s a long way away.

One thing seems certain, though, and that’s private investors should soon have a larger share of the market to play in. Conforming limits are dropping and may even go back towards the approximately $400,000 they were before the crisis.

Goodman noted that up to 20% of the country’s 55 million mortgages are delinquent or under stress—not good news for borrowers or lenders but an enormous potential market for distressed asset sales.

She noted two constraints on a re-emerging Jumbo MBS market: a lack of credit (originations have slipped to $200 billion from $450 billion at the height of the market) and low rates that are impeding profitable securitizations.

So, it looks as if the nonconforming doldrums will continue for another year, at least. The trend in originations is down, certainly not conducive to a boost in MBS. Rates could bounce up, though they have been slow to do so, staying at levels that should have caused a massive refinancing boom, but didn’t.

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