Panel
How to Restart the Private Market for Mortgage Credit
- Federal Housing Finance Agency (FHFA) and Treasury Department anticipate continuing to direct Government-Sponsored Enterprises (GSEs) to sell credit risk to private capital markets and aim to restart the private-label securitization market over the coming years.
- Consensus among legislators and industry participants points toward a "best way forward" involving the transfer of credit risk from the $300 billion portfolios held by Fannie Mae and Freddie Mac to private entities, citing the reduction of moral hazards associated with private gain and public losses.
- Congressional proposals and industry expectations identify the need for legislative fixes, specifically addressing the Investment Company Act of 1940 and tax consequences for Real Estate Investment Trusts (REITs), to increase participation, with REITs currently comprising only 2% of the market.
- Industry forecasts project a gradual expansion of the StackerCast market from $30 billion to $60 billion and eventually $100 billion, with expectations that NAIC ratings or capital requirements adjustments will eventually encourage insurance companies to transition from legacy assets to these structures.
- Mortgage insurers are expected to provide deeper coverage down to 50% of loan value without new legislation, potentially serving as a transitional mechanism to increase private capital involvement while providing more than double the loss protection for GSEs.
- Long-term predictions suggest a slow return of an active private-label market for jumbo mortgages, contingent upon shrinking the GSE "box" for eligible loans and standardizing loan attributes to create transparent markets.
- Market liquidity and stability are expected to face risks during periods of volatility, such as potential withdrawals by Wall Street dealers limiting liquidity for non-investment-grade securities, necessitating diverse sources of credit risk beyond private capital.
- Structural expectations include the creation of a common securitization platform to standardize data and servicing, allowing investors to underwrite transactions independently based on confidence in accurate information rather than originator "skin in the game."
- Future market dynamics anticipate GSEs focusing on scalable transactions that also meet broader objectives like small lender access and pricing transparency, with technology expected to facilitate the tracing of individual loan attributes.
- Legislative and regulatory actions are viewed as prerequisites for housing finance reform to reduce uncertainty, with comprehensive reform considered a potential path to proving that private capital can sustainably take on mortgage credit.