The housing finance reform bill introduced by US Senators Tim Johnson and Mike Crapo could be key to unlocking the private-label residential mortgage-backed securities (RMBS) market, according to Moody’s Investors Service.
Under the bill, a new agency, the Federal Mortgage Insurance Corporation (FMIC) would provide a government backstop for eligible mortgage pools that have secured a private first loss piece of 10% through FMIC-approved risk-sharing mechanisms.
Fewer residential mortgage loans would be eligible for inclusion in government-guaranteed securities because of changes in criteria establishing which securitizations can receive government guarantees. “Loans would only be eligible for the FMIC backstop if they meet the CFPB’s Qualified Mortgage (QM) standards, among other requirements,” Moody’s Vice President Sang Shin said in a press release.
The new requirements are more stringent than the GSEs’ current eligibility criteria, which do not mandate that loans meet all QM standards to be eligible for securitization.
Moody’s believes that the more rigorous requirements for government-guaranteed securitizations under the proposed framework, would mean that a greater proportion of new loans would be eligible for securitization only through the private-label market.
According to Moody’s Sang, more issuance could happen “If the new system gives investors added confidence in the securitization market as a result of increased transparency and standardization and encourages originators or aggregators that had been on the sidelines to participate in the secondary securitization market. “
However investor uncertainty regarding the wind down of Fannie Mae and Freddie Mac, as well as the legislation’s provision on keeping the existing conforming mortgage loan balance requirements, would cloud private label issuance, initially.
“The conforming loan provision is a shift from the Obama administration’s stance and previous housing reform proposals such as the bill introduced last year by Senators Corker and Warner,” says Sang. “Maintaining the existing maximum conforming loan balance would limit the potential increase in private-label RMBS issuance.”