As secondary marketing analysts and participants debate over how to revive private-label activity in a market dominated by government-sponsored enterprises, one housing official at the U.S. Treasury Department says the system may be stuck in a catch-22 over agency ratings.
Speaking at an event hosted by the Bipartisan Policy Center in Washington, D.C., Michael Stegman, counselor to the Treasury secretary for housing finance policy, explained that lenders are currently reluctant to make non-agency loans without first knowing how they'll rate on the market. At the same time, credit rating agencies don't rate mortgage pools until they see the actual loan tape.
"The resulting stalemate means more diverse pools will not be brought to market," he said.
The problem is just one in a series of what Stegman referred to as "chicken and the egg paradoxes"—separate problems that contribute to each other. As an example, Stegman gave the stance of the Federal Housing Finance Agency (FHFA), which has said it will not consider lowering the conforming loan limits Fannie Mae and Freddie Mac can accept until it can be sure there is enough private capital to fill the gap in the market.
Meanwhile, he said, securities issuers say the private-label segment of the market won't be able to step in until the government shrinks its presence.
Stegman also noted the "chicken and the egg" problem of securities issuers' reluctance to devote resources to help fix private-label structural problems "when the economics of mortgage funding favor other forms of execution."
"This type of short-sighted resource allocation will lengthen the time it takes to address critical investor confidence issues—insufficiency of representation and warranty enforcement mechanisms, opaqueness in servicing practices, and lack of transparency in data and disclosures—and inevitably delay the restart of the PLS market," he said.
These issues come at a time when industry groups and lawmakers are working to push reform that would diminish or dissolve Fannie and Freddie, which together guarantee an estimated 80 percent of new loans. With battles over midterm elections currently raging, analysts predict any progress on that front won't come until 2015 or even 2016 at the earliest.
For now, Stegman said Treasury is working with industry groups, issuers, investors, and other parties to "put private capital back at the center of the housing finance system." Next on the agenda, he said, are meetings with credit rating agencies he hopes will help illuminate their methodologies.
"Treasury believes that by increasing clarity around loss projections and subordination requirements for more diverse pools of collateral, credit rating agencies can stimulate a constructive market dialogue and foster greater confidence in the credit rating process," he said.