US Residential Mortgage-Backed Securities Market Coming Back

Date Published 6/26/2013
Author Marja Hoek-Smit
Country United States

US Residential Mortgage-Backed Securities Market Coming Back

June 2013

According to a recent report prepared by Mark Zandi, Chief Economist of Moody Analytics, the market for private residential mortgage-backed securities (RMBS) is slowly resurrecting after a 5-year hiatus. The collapse of the RMBS market was at the heart of the financial crisis. Its revival is essential to provide the mortgage credit necessary to stimulate the housing sector. Several small private RMBS deals, backed by high quality mortgage loans, have been concluded recently and more are planned in coming months.

Signs for a revival of the private RMBS market are primarily attributable to

  • A rapidly improving housing market and better mortgage credit conditions – House prices are rising across markets. Additionally, there is a dramatic decline in the share of home sales involving foreclosures or short sales.
  • Investor interest is strengthening – Stock prices have surged for companies that have anything to do with housing and mortgages. Record low interests have left investors hungry for yield, turning to the private RMBS market.
  • Reduced involvement by the government in the mortgage market – FHA, Fannie Mae and Freddie Mac have all aggressively acted to reduce their roles in the mortgage market by tightening underwriting standards, raising insurance premiums and increasing the cost of borrowing.
  • Bloated bank balance sheets – There are several incentives for banks to securitize the loans and not to hold them on their balance sheets. Some of the nation’s largest banks now originate and service the bulk of mortgage loans and have kept a sizable number of these loans on their balance sheets. Besides concerns for put-back risk with Fannie and Freddie and rescission risk with private mortgage insurance companies, the new Basel III capital standards for mortgage businesses will make it expensive for banks to retain the value of servicing mortgage loans on their books.
  • Regulatory clarification – The Federal Reserve has provided a definition for Qualifying Residential Mortgage which could help jump-start private RMBS issuance.
Full Report here.

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