In total, the federal government is directly responsible for guaranteeing the credit quality of roughly 95% of new mortgage originations.
As a result, American Securitization Forum members, along with other market participants and policymakers — from both sides of the political aisle — believe that this level of government involvement is “neither sustainable nor advisable,” the advocacy group said in its latest white paper.
ASF formulated key proposals that can be implemented in the short-term to expedite the process of bringing private capital back to the mortgage market by incrementally reducing Fannie Mae and Freddie Mac dominance.
One of the main legislative proposals the ASF wants to implement is establishing a framework for a U.S. covered bond market.
Put simply, covered bonds are debt obligations of a bank issuer that also provides investors with recourse to a collateral pool in the event of an issuer’s default.
“Currently, many non-U.S. regulated banks are selling billions of dollars of covered bonds to U.S. investors,” said Tom Deutsch, executive director of ASF.
He added, “There is currently no legal framework in place for U.S. banks to issue covered bonds and the Federal Deposit Insurance Corporation has indicated that it would exercises rights, including potentially repudiation rights, against the collateral pool in the event of the bank’s insolvency, which could effectively reduce the amounts otherwise available to pay covered bond issuers.”
The solution is to pass legislation that establishes a legal framework for a covered bond market in the U.S., including provisions to ease investors concerns regarding the actions of the FDIC in the event of the bank issuer’s failure.
As a result, promoting U.S. banks to issue covered bonds would effectively establish an additional mortgage financing technique and other means to encourage private capital back into the industry, the white paper noted.
“Given the success of recent private-label issuers in the market, the time to implement these decisions is now,” ASF explained.
However, some critics believe that support for covered bonds in the U.S. is a possibility, but isn’t necessary.
For one, the U.S. is suddenly and quickly coming up to speed with meeting meeting voluntary standards. Some big names in policy are throwing support behind such measures.
In 2012, there were approximately $3.5 billion of new-issue residential mortgage-backed securities backed by newly originated loans, according to securitization trade group.
So far this year, RMBS issuers have matched last year’s total and industry researchers estimate that the total volume for 2013 could be between $15 billion and $20 billion, ASF projected.
“This recent uptick in private-label issuance can be attributed to a number of factors, including stabilizing home prices, industry efforts to revamp transaction terms and disclosure, better private-label execution for issuers and investors seeking higher-yielding assets in today’s low interest rate environment,” according to the white paper.
However, it’s important to note that these issuance levels are mere specks when compared to pre-crisis levels. Additionally, private-label issuance levels remain a small fraction of the overall $1 trillion market for mortgage originations.
To promote a more meaningful private-label market, policymakers must begin pulling levers to eliminate impediments to private capital that exist.
