Residential Mortgage Backed Securities ( RMBS) Remain Stagnant Since The Financial crisis! Team Thayer Real Estate News
RMBS Market Been Stagnant Since the Crisis?
The private-label residential mortgage-backed securities market has remained stagnant since the financial crisis, even though securitization in many asset classes has resumed (including commercial mortgage-backed securities); a new brief from theUrban Institute examines why the RMBS market has not recovered similar to the way other asset classes have, and contains suggestions for precipitating such a recovery.
In the brief, titled "The Rebirth of Securitization: Where is the Private-Label Mortgage Market?," the UI's Director of Housing Finance Policy, Laurie Goodman, noted that the securitization of residential mortgage-loans backed by government agencies such as Fannie Mae and Freddie Mac have been strong while securitization of loans without a government backing has collapsed. While the collapse has not affected high net worth borrowers with perfect credit, since banks compete for these loans, access will become difficult and expensive as the profitability of holding such loans declines in the absence of a PLS market—which may be the impetus for change, Goodman said.
In this lending environment, borrowers with less wealth and imperfect credit who do not qualify for government-backed loans are faced with high rates and limited credit availability, according to Goodman. Since banks do not want such loans on their balance sheets, there is no market for the securities of those loans.
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The problem is not that investors are not willing to take the risk; Fannie Mae and Freddie Mac have transferred risk on $667 billion in unpaid principal balance (UPB) through a combined total of 22 Connecticut Avenue Series (CAS) and Structured Agency Credit Risk (STACR) transactions since 2013, according to a report released in August 2015 by the GSEs' conservator, the FHFA.
Three factors explain the difference in volume between securitizations for mortgages and other asset classes, according to Goodman:
- Mortgages experienced the most severe dislocation of all asset classes;
- Significant policy changes affecting already outstanding securities post-crisis for mortgages;
- Private-label securities were "riddled" with conflicts of interest among all key stakeholders while interests of investors and issuers of securities for other asset classes were aligned for the most part
One thing that needs to change in order for the PLS market to recover is the standardization of documentation; currently, there is no such standardization because each securitization sponsor has its own documentation, Goodman said.
"The market needs to standardize the documentation so investors can quickly understand how each deal differs from others," Goodman said. "Given that bank and nonbank originators have different needs, several standard ways to handle the enforcement of reps and warrants may be needed: standard language needs to be used for each securitization across all issuers, and investors must be able to assess quickly which set of clauses has been selected for each deal."
"The market needs to standardize the documentation so investors can quickly understand how each deal differs from others."
Another change to increase volume in the PLS market is the introduction of a deal agent charged with rep and warrant review on all loans that go more than 60 days delinquent and other loans as needed, as well as enforcing rep and warrant breaches; oversight of servicing; cash flow reconciliation; and communication and reporting to investors, according to Goodman, Previously, there was no one effectively charged with "looking after the investor" in residential mortgage-backed securities.
Another change that would boost the PLS market is increasing transparency in the monitoring of servicing operations; Goodman said investors would like servicers to provide better transparency for all loan modifications, including those generated by mortgage settlements. Servicers should also provide transparency on their decisions as to when to employ foreclosure alternatives, Goodman said; the deal agent would then be charged with ensuring that investor interests are upheld during the loan modification/loss mitigation processes.
Click here to read the entire brief.
Justin Lee Thayer is Lane counties expert in market analysis for real estate investors. Call Justin @ 541-543-7287