Private-Label RMBS Market Lags Following Financial Crisis

Although most securitization asset classes began to pick up in the years following the financial crisis, the private-label residential mortgage-backed securities (RMBS) market remains stagnant.

In an brief released Wednesday, Laurie Goodman, Director, Housing Finance Policy Center at Urban Institute discusses why the residential mortgage market remains unmoved and how this problem can be fixed.

Securitization of loans backed by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs is strong, while loans with no government backing has weakened.

“This collapse has not affected the availability or cost of credit for loans made to high–net worth borrowers or borrowers with perfect credit, because banks compete to put those loans on their balance sheets,” Goodman wrote. “As the profitability of holding those loans declines, in the absence of a private-label securities (PLS) market, access for those borrowers will become more difficult and expensive. That change may prove the impetus to solve many of the outstanding PLS market issues.”

 Differences in recent volumes between other asset-backed securitization and private-label RMBSs:

1. Mortgages exhibited the most severe dislocations of any asset class. These dislocations exposed flaws in the cash flow waterfall and the collateral that backed private-label securities.
2. Mortgages were the only asset class to experience significant policy changes affecting already outstanding securities in the wake of the crisis.
3. Though the interests of investors and issuers were largely aligned in the securitizations of other asset classes, private-label securities were riddled with conflicts of interest among all key players.

The brief says that many of the first factor problems have already been fixed, but the second and third issues still persist.

In order to properly address these differences, Goodman suggests that documentation should be standardized, a deal agent must be established, and better transparency among servicing operations needs to be created.

“The successful resolution of the issues discussed in this issue brief and the return of a robust PLS market for pristine collateral are preconditions for securitization on less-than-pristine collateral as a vehicle for risk transfer,” Goodman said. “In the near term, we believe these loans will be held on the balance sheets of private equity funds, money managers, and real estate investment trusts; securitization will be rare and occur only as a funding vehicle for these assets, not to transfer credit risk. And without a robust financing vehicle, we expect origination of these loans to be fairly limited.”

Click here to read the complete Urban Institute brief.