The Private Mortgage Market....What You Need to Know!

Revitalizing the Private Mortgage Market

By mid-May, the spring home-selling season is usually in full swing. Homes look their best, and buyers rush to lock in deals so they can relocate in the summer. But this year, things are not so good. Despite low home prices, sales are sluggish as the market struggles to recover from the burst bubble of the past decade.
Many potential buyers are scared off by worries that a home bought this spring could be worth less a few months later, given that prices have fallen by more than 8 percent over the past 12 months, according to Zillow.com. Others are eager to buy at today’s low prices, but cannot get a mortgage because lenders have tightened standards to avoid a repeat of the default and foreclosure crisis.
Amid all the uncertainty, a number of regulators, lawmakers and market experts continue to wonder: What will the mortgage market, so essential to a healthy housing sector, look like in the future? Key to that is a rekindling of the private market for securitizations—the process of converting mortgages into bonds for sale to investors. Securitization provides the money lent to homeowners. In March, the Federal Reserve, Federal Deposit Insurance Corp. and four other agencies issued proposed new rules for the private securitization market—requirements likely to toughen standards for both borrowers and lenders. But many experts feel the proposals—still subject to comment before final implementation, possibly this summer—would not correct the mortgage market’s problems.
“I think it’s a missed opportunity,” says Susan M. Wachter, professor of real estate at The Wharton School and co-editor of a new book, The American Mortgage System: Crisis and Reform. “I think that we need obviously to envision a restructured housing finance system to replace the failed system that we have had, and this does not get us there. Quite the contrary, it raises more questions.”
Currently, more than 90 percent of new U.S. mortgages are backed by the government entities Fannie Mae, Freddie Mac and the Federal Housing Administration, but almost no one wants the government to continue to be the prime source of mortgage securitization. After suffering huge losses from homeowners who failed to make payments, Fannie and Freddie were taken over by the federal government in 2008 and have so far required a taxpayer bailout exceeding $130 billion. The Obama administration has proposed phasing out the two firms over an unspecified number of years, but that cannot happen without a resurgence of the private securitization market.
The “private-label market,” which was all but nonexistent before the 1990s, skyrocketed from 2004 to 2008, when it accounted for more than $2 trillion in outstanding mortgages. Now it is barely breathing. Enormous losses have scared off the investors who buy private mortgage bonds, which do not carry the guarantees that make Fannie and Freddie bonds attractive.
The federal proposals issued in March, required under the 2010 Dodd-Frank financial reform law, are designed to discourage the issuance of risky mortgages and securities based on them. They would require that firms that issue mortgage-backed securities retain 5 percent of the investment risk contained in the bonds sold to investors. Having “skin in the game,” or a stake in the bonds’ investment prospects, should make the participants careful in approving mortgages and putting the bond packages together, the agencies say.