I have to start with the best line from yesterday at the ABS East conference underway in Miami.
Tom Deutsch, American Securitization Forum, said that the concept of eminent domain applied to the taking of mortgage notes is “wackadoodle.”
What I didn’t realize when initially heard this was that wackadoodle is actually a real word referring to a person as eccentric, ditsy, or funny. For the concept of eminent domain applied to mortgage notes as being “wackadoodle” is probably in the scheme of things not bad at all, as I have heard much worse in this context.
More seriously though, as conference panelists noted, the idea is costly for existing mortgages and their investors as well as for future mortgages potentially everywhere if the practice were to gain legal precedent in even one jurisdiction.
And the cost- higher down payments required on new loans to account for the asymmetric loss risk to the investor caused by the possibility of the “taking” of a mortgage note through eminent domain if house prices decline. It seems to me that with 45% of mortgaged borrowers underwater or under-equitied, having 20% or less equity, if we move the bar even further down we only make it that much more difficult for borrowers to refinance or buy a home.
There was also discussion today of a new emerging asset class for securitization!
Now, it has been a while since we have talked of new asset classes in this industry and we are all well aware what happened to them, but this time it is different. The asset class is single-family residential rental. The REO-to-Rental pilot of the FHFA is certainly one example, but the market is potentially much larger than government-held REOs, and could, for that matter, include distressed properties more broadly defined than just REO.
There was, of course, the discussion of the need for data and analytics for this emerging asset class. Mike Saccento, CoreLogic, discussed the single family rental data assets and models being developed and made available to the market. Kruti Muni, Moody’s Investors Service, discussed in detail how potential securities for this asset class would be rated.
A hybrid approach of CMBS and RMBS seems most sensible and addresses tenant risk as well as the effectiveness of the property manager as a source of risk. It is interesting, okay maybe only to an economist, to consider the importance of the property manager in the performance of the security.
After all, it’s the property manager’s capability that will in large part determine the success of the rental cash flow as the manager deals with vacancy, turnover, and property maintenance and condition. The property manager is to the rental security as servicer is to a NPL security.
I will close with a short comment on the future of private label securitization as envisioned by Congressman David Schweikert (R-Ariz.).
Expect the rules being written by policy makers and regulators today to create an RMBS market with a set of commoditized and standardized securities. Much remains to be seen but that will be a far cry from the “wild west” days of old.
Mark Fleming is the chief economist at CoreLogic.
