No Need to Go Overboard With New Reverse Mortgage Underwriting, NRMLA Says

•December 6, 2011 • Leave a Comment

Elizabeth Ecker via Reverse Mortgage Daily

Some originators raised questions during an industry webinar last week as to how much qualifying is actually necessary in the process for underwriting reverse mortgage borrowers for property charges. Under guidance from the National Reverse Mortgage Lenders Association regarding the new financial assessment, it’s important to qualify the borrower, but not overcomplicate the process, the association says.

“It’s recommended that you verify only enough [income sources] to qualify,” said Steve Irwin, executive vice president, policy for NRMLA. The association’s committee on financial assessment has been referring to such measurements as “circuit breakers,” he said.

Irwin reiterated NRMLA’s guidance on the capacity and condition tests in an email to RMD.

“The NRMLA Guidance on Limited Underwriting states: ‘The lender should gather only the minimum amount of information necessary and appropriate to perform and document the Capacity Test and the Applicant Condition tests,’” he said.

The qualification process, so far, has added time and steps for MetLife borrowers, working with the one and only lender that has publicly implemented changes based on the recommendation from NRMLA. The company told RMD in November that it had added resources to aid in the process and address questions for originators as they adapt to the new procedures.

Under the NRMLA guidance, which has yet to be formally adopted by other lenders, originators are encouraged to verify a borrower’s income sources to ensure that he or she has the capacity to pay for property charges including tax and insurance.

But what many have called stringent new guidelines shouldn’t rule out borrowers unnecessarily, NRMLA says. The recommendation is to use them as much as needed and not further.

“We don’t want to make this overly complicated or burdensome. Verify enough to qualify and then stop,” Irwin said during the webinar. “…require only the minimum amount of information necessary and appropriate,” he told RMD. The circuit breaker concept, he said, would enable to lender to stop collecting documentation from the applicant who demonstrated the ability to pass the capacity test and the applicant conditions tests.

Many originators have speculated that the new underwriting is likely to rule out a good number of borrowers, with industry analyst Reverse Market Insight estimating that the changes implemented by MetLife could rule out as many as 10% to 30% of borrowers that would have qualified prior to the changes.



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50% of Reverse Borrowers Would Recommend Reverse Mortgages to Family and Friends

•November 29, 2011 • Leave a Comment

Tom Kelly via Inman News

John Marttila has seen his share of slam-dunk winners and woeful losers.

The leader of Boston-based Marttila Strategies, a public-opinion research firm, has worked for a wide variety of elected officials in all regions of the United States, including Vice President Joe Biden, former presidential candidate John Kerry, Massachusetts Gov. Deval Patrick, and other members of the U.S. House and Senate.

The company also was employed to measure and promote numerous successful ballot issues around the country.

But seldom has his research produced a more satisfied contingent as those his company polled regarding their experiences with reverse mortgages. While the financial product received a black eye for early versions that included an equity share with the lender, Marttila Strategies’ recent survey revealed that today’s seniors are extremely happy with their reverse loans.

"Rarely does a research program provide such decisive results as this one has," Marttila told Lew Sichelman of National Mortgage News. "These attitudes belie the negative accounts that have been widely reported in the media."

Some of the recent negativity surrounding reverses has come from adult children who have seen their folks swayed into buying questionable annuities with their reverse mortgage funds. While reverse mortgages had a reputation for sky-high costs, rates and fees have come down. Fixed-rate programs are now in place, and counseling is mandatory before any loan can be processed.

Reverse mortgages are available to seniors aged 62 and older who have significant home equity. They are designed to enable elderly homeowners to borrow against the equity in their homes without having to make monthly payments, as is required with a traditional "forward" mortgage or home equity loan.

Under a reverse mortgage, funds are advanced to the borrower and interest accrues, but the outstanding balance is not due until the last borrower leaves the home, sells or passes away.

Borrowers may draw down funds as a lump sum at loan origination, establish a line of credit or request fixed monthly payments for as long as they continue to live in the home. Homeowners also have used a combination of those plans, for example a lump sum at closing with an ongoing credit line.

When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.

Marttila Strategies issued three national surveys and conducted six focus groups to determine how three different cohorts felt about reverse mortgages.

The groups included adult children with at least one surviving parent who indicated that their parents’ mortgage balance was less than half what the house was worth; seniors who owe less than 50 percent of their home’s equity but do not hold reverse mortgages; and owners who have had reverse mortgage for at least two years.

Presented with a 10-point scale, with 10 representing the maximum level of satisfaction, 43 percent of the respondents gave their mortgages the highest rating possible, a 10. Thirty-two percent graded their loans at between six and nine.

In addition, more than half would "definitely" recommend a reverse mortgage to another family member or friend, and 28 percent more would "probably" do so. Only 15 percent said they definitely would not recommend the loan.

The data also revealed four salient facts:

  • Seniors (and their adult children) are deeply worried about the current economic situation, and the consistent sentiment is that the nation is facing "tougher times" ahead.
  • An overwhelming majority of seniors think that their best financial strategy is for them to pay their bills and not worry about leaving an inheritance. Their adult children agreed.
  • Seniors want to stay in their homes for the rest of their lives.
  • More than 40 percent of the respondents worry that they will not have enough money in the future to lead the kind of life they would want.

An example of the last point was recently shown in Idaho. AARP reported that there was a 93 percent increase in just nine years in the number of those 50 years old and older taking out, or planning to take out, a reverse mortgage. Nearly 7 percent of this group lives in poverty, the third-highest rate in the Western region.

According to the U.S. Census, Idaho is the 39th most populated state but it is seventh for the percentage of people 50 and older who have taken out, or are planning to take out, a reverse mortgage.

It’s time to recognize that a majority of seniors are pleased with their reverse mortgages. Can you say the same about your friends with conventional, "forward" loans?

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Mortgage Principal Can Be Cut Without Moral Hazard

•November 22, 2011 • Leave a Comment

by Mark Fleming via American Banker

At the end of October, the Obama Administration announced changes to the Home Affordability Refinance Program that conceivably will make as many as 2 million more homeowners eligible for refinancing over the next two years. This will lower the default risk for the government sponsored entities and their ultimate backers, the American taxpayers, and should provide some level of economic stimulus.

But it will help housing only indirectly, because it doesn’t address the two strongest headwinds that are depressing housing prices: negative equity and shadow inventory. Addressing these challenges will require new thinking on the strategic use of principal reductions. Although the cost of this approach would be significant, it could be far less than the $699-billion price tag usually associated with negative equity and could save as many as three million more at-risk homeowners.

The drop in mortgage rates to record lows in 2011 has not resulted in the expected surge in refinances. The reasons for the lack of refinance activity include: the prevalence of negative equity; insufficient borrower credit quality or income; GSE hurdles, such as loan-level price adjustments, and investors’ unwillingness to give up their rights to require lenders to repurchase loans that did not meet GSE guidelines. Repurchase risk makes lenders less willing to take on more liability and due diligence risk (although Harp II attempts to address some of these concerns).

There already have been many government efforts to aid borrowers in refinancing, which include version one of Harp, Hope for Homeowners and the FHA Short Refinance program. They have not produced sufficient volume to dramatically influence housing market conditions because the eligibility criteria were too tight, the rates offered were too high, or borrowers had qualification constraints.

We have seen adjustments made to Harp, but only time will reveal the full economic stimulus effect of increased refinance activity.

It’s important to note that a bond investor’s interest income is a borrower’s interest expense. That means that refinancing millions of borrowers and offering them lower rates would reduce household mortgage expenses, but it would also reduce investors’ interest income by roughly the same proportion.

History, as a guide, shows that in prior large refinance waves, with only one exception, there was no real discernable impact on consumer spending. The only exception occurred in 2003, when the mortgage market experienced the largest refinance wave ever recorded. Even then, the impact on consumer spending was small and transitory, and the potential refinance wave this time would be smaller. In any case, refinancing existing mortgage balances does not address the fundamental issue of negative equity.

The large number of homes with negative equity is holding back purchase demand for homes by reducing household mobility and elevating the risk that seriously delinquent borrowers will move into foreclosure because they don’t have enough equity to refinance or sell their homes.

As of the third quarter, 22 percent of U.S. homes — nearly 11 million borrowers — were upside down. The average such borrower was upside down by $65,000 and aggregate negative equity was more than $699 billion. If negative equity diminishes, it will greatly aid the housing market recovery by unlocking pent-up demand and reducing foreclosure risk. As would be expected, re-default rates for modifications with principal reduction are much lower than other modification.

There are many concerns with principal reduction, but moral hazard and costs to banks and taxpayers are the two that stand out.

Moral hazard occurs when individuals behave differently when insulated from risk than they do when fully exposed. If servicers give principal reductions to borrowers who are delinquent and in a negative equity position, which insulates them against negative-equity risk, borrowers who are current may purposely become delinquent so that they can also receive a principal reduction.

However, there are many ways to deal successfully with moral hazard:

  • Servicers can offer borrowers a principal reduction, but at some cost. This would be similar to a car insurance deductible and could be structured in different ways. For example, servicers could reduce principal in exchange for the borrower giving up a portion of future appreciation.
  • A shared-appreciation mortgage that reduces principal could be taxed as a capital gain rather than as ordinary income as is the case today.
  • Servicers could also change mortgage terms to include recourse in the event of a default, such as the right to non-housing assets in addition to foreclosing.

Basically, servicers could address the moral-hazard risk associated with principal reduction through appropriate loan terms.

The cost of principal reduction is another large hurdle. It’s certain that not all $699 billion dollars in negative equity needs to be forgiven. There are 6.3 million borrowers with first liens only who are current on their mortgage payments and underwater by an average of $52,000, representing $314 billion in total. Within that segment, servicers could target moderately upside down borrowers (110% to 150% LTV) who are most likely to respond to principal-reduction offers. That would help nearly 3 million borrowers (or nearly one third of all negative equity borrowers), at a cost of $118 billion. Although $118 billion is clearly not trivial, it is much more manageable than $699 billion.

Streamlined refinance plans will improve household monthly obligations but it remains to be seen if the will create meaningful economic stimulus. Plans to reduce principle are more likely to greatly aid the housing market recovery by unlocking pent-up demand and reducing foreclosure risk. It is important that these plans also have features that address the moral hazard risk. Targeting principle reductions as described above would aid the greatest number of borrowers for the least amount of money, reduce current and future distressed shadow inventory and put less downward pressure on prices today and in the future.

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Government Housing Strategy: The Industry Reacts

•November 22, 2011 • Leave a Comment

via Mortgage Solutions

The government has today published its strategy on “unblocking” the housing market, stimulating buying, lending, construction and job creation.

The Prime Minister David Cameron has promised the plan "will break the current cycle in which lenders won’t lend, builders can’t build and buyers can’t buy."

A key announcement was the widely touted government and house builder backed mortgage indemnity guarantee for new build properties, aiming to get 100,000 first-time buyers access to 95% LTV loans.

In addition, there were announcements around supporting the private rented sector, self build, tackling empty homes and overhauling social housing.

The property industry has largely welcomed the plans, but with notes of caution:

CML director general Paul Smee

This [new build MIG] scheme is good news for home buyers, developers and indeed the UK economy. Lenders will be able to reduce the level of deposit needed by home buyers in the new build sector, enabling more buyers to buy and so supporting the flow of new housing development, with all its positive consequences for jobs and the economy as a whole.

UK lenders will not be compromising the quality of their lending or increasing their risk of loss through this scheme.

It is also anticipated that lending within the scheme will attract relief on the regulatory capital that would otherwise be required on high loan-to-value lending, because of the significant mitigation of the lending risk.

Paul Broadhead, head of mortgage policy at the BSA

We welcome the government’s support for a new build indemnity scheme initiative aimed at helping those with a modest deposit buy their own home. This joined up thinking from mortgage lenders, builders and the government is good for borrowers, the housing industry and in turn jobs.

For the scheme to deliver its full benefits to consumers, it is important that lenders of all sizes can participate. We look forward to working with the government to help ensure this is the case.

Grenville Turner, chief executive of Countrywide

The measures announced today are a step in the right direction and address the key fundamental issues that have restricted the housing market in recent years.

The government needs to ensure that its promise of increasing house building is followed through and not restricted by planning red tape.

Whilst the proposed new build indemnity scheme is a welcomed boost to homebuilders and prospective buyers, it is disappointing to see a lack of measures to assist the vast majority of home movers.

A Stamp Duty holiday for all homebuyers up to £250,000 by would have been a welcomed boost to the resale market and should still be considered.

We also welcome the consideration of tax break measures for buy-to-let investors. Any government support to encourage investment in the buy-to-let sector will help to relieve the supply and demand imbalance.

Charles Haresnape, managing director of Aldermore Residential Mortgages

Any initiative designed to help the housing market and first-time buyers in particular, has to be welcomed.

However, it will be interesting to hear precisely how the government backed mortgage indemnity scheme will work and how the proposed £400m house building fund translates into new homes.

At the moment there are approximately 100,000 new homes being built every year, but that figure needs to increase to 240,000 if demand for new housing is to be satisfied. It is suggested that the government proposed new initiative will result in just 16,000 new properties, which still leaves the government woefully short of its target.

Graham Beale, chief executive of Nationwide

This scheme seeks to boost the supply of properties available with modest deposits and, as such, we are pleased to be part of it, helping to shape its design and development.

We would really like to see people who are saving for a deposit given more help through higher ISA limits and the flexibility to move their funds between cash and equity ISA products, without the restrictions that are in place now.

Paragon Group chief executive Nigel Terrington

It is pleasing that the government has recognized the important role the private rented sector plays in providing a home to millions of renters.

It is important that the private rented sector has a committed base of investor landlords to enable it to grow, and fostering a fiscal and regulatory environment that encourages that is vital.

Institutional investment will only play a complementary role to the mainstay of the private rented sector, the private landlord, and so whilst there is a focus on attracting greater levels of institutional investment into the sector, policies must not favor institutions over individuals.

Stewart Baseley, executive chairman of the HBF

This scheme will allow people to buy their new home on realistic terms and help in particular hard pressed first time buyers.

It will also be a huge boost to house building. Since 2007, the biggest constraint on homes being built has been mortgage availability. This scheme will see more desperately needed homes being built, create jobs and give the economy the boost it needs.

Helen Adams of

Funding which only supports new build is good for the house builders who are being subsidised, but does little to move the whole market as there is no onward chain when a new home is purchased.

Tracy Kellett, managing director of buying agents BDI Home Finders

If the government and house builders are taking on the risk, what will the criteria be for people applying for these loans? The real number of people enjoying the scheme is likely to be far lower than the headline number. The devil, as ever, is in the detail.
The government has become so focused on the first-time buyer that it has forgotten the squeezed middle. Any housing strategy has to cascade upwards through the chain, not focus purely on the first link.
Given the scale of the market crisis, it’s unlikely it can do anything at all. Ultimately, only the market can make the market better.


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Reverse Mortgage Industry—Too Big or Important to Fail?

•November 15, 2011 • Leave a Comment

John Yedinak via Reverse Mortgage Daily

Only a few months ago, an executive from the top reverse mortgage lender called me and said it felt as though we were living through Andrew Ross Sorkin’s “Too Big to Fail.”

Much like the movie, many any of the institutions that helped build the industry were disappearing overnight. Obviously on a smaller scale, but nonetheless just as dramatic for many of us who have built businesses on top of this industry as the largest reverse mortgage lenders exited one after the other.

I always tell people: “We’ve made it this far… we’ll be fine”, but for the first time I actually started to see evidence things are turning for the better during the National Reverse Mortgage Lenders conference in October.

During the event I noticed a few things. First, if there was an overarching theme for the conference, it centered around tax and insurance defaults and the steps needed to limit the number of future occurrences. No one claimed to have the perfect answer, but the industry was united in its effort by voting unanimously to approve a set of underwriting guidelines to address the situation. Whether you think the guidelines are acceptable doesn’t really matter—unless you’re a Ginnie Mae issuer.

Without this group of lenders that sells reverse mortgages, there wouldn’t be a secondary market and there wouldn’t be an industry. The Ginnie Mae issuers are the only lenders with real “skin in the game.” Why those who have left the industry are still involved in making decisions about the future of our business at the board level is beyond me.

MetLife was the first to release its guidelines, and many in the industry feel it might have gone a little too far. Others are currently in the process of releasing their own versions, but meanwhile, everyone is waiting for the Department of Housing and Urban Development to come out with an official rule for the industry to follow.

“It requires public notice and rule-making, which is a lengthy process,” we were told by just about every government official who spoke on the topic during the conference.

Karin Hill, director at HUD’s Office of Single Family Program Development attended the meeting with NRMLA board members prior to its vote on the guidelines, which seems a likely sign that HUD is on board with the industry’s decision. I can’t imagine NRMLA moving forward if HUD wasn’t in support of the direction.

Aside from making progress on steps needed to limit the number of taxes and insurance defaults, the conference included a few new faces—a nice surprise to an industry that saw Bank of America and Wells Fargo exit only a few months ago. While I won’t name names, I will say that the new companies are big players in different spaces, and let’s just say that MetLife and Genworth won’t likely be the only major insurance providers to offer reverse mortgages in 2012.

I’m told other deals are ready to close as well, but for fear of screwing any of them up, I’ll leave it at that. It’s a bit strange, but the big bank exits seem to be attracting large players who may have shied away from the industry, considering the major brands that were already involved in the space. That’s not to say these deals couldn’t fall apart, but for now things are looking better than they did six months ago.

If there was word I’d use to describe the NRMLA conference it would be Progress.

While I wasn’t sitting in on the NRMLA board meeting discussing the financial assessment, I bet it looked a lot like this scene in Too Big to Fail. Everyone coming together to address the challenges facing the industry and doing it in a united front.

Everyone might not like the outcome of the financial assessment, but its something that needs to be done and the industry has shown it’s behind the decision. It may not be perfect, but it’s progress one step closer to finding the solution.

So while our industry might not be too big to fail, it’s too important to disappear. There is a debate going on in Washington, D.C., about the future of retirement in this country and while reverse mortgages might not be the answer, they’re without a doubt… part of the solution.


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Falling Home Prices Leads to Bigger Fannie Mae Loss; Asks Taxpayers for $7.8 Billion More

•November 9, 2011 • Leave a Comment

via AP

Mortgage giant Fannie Mae is asking the federal government for $7.8 billion in aid to covers its losses in the July-September quarter.

The government-controlled company said Tuesday that it lost $7.6 billion in the third quarter. Low mortgage rates reduced profits and declining home prices caused more defaults on loans it had guaranteed.

The government rescued Fannie Mae and sibling company Freddie Mac in September 2008 to cover their losses on soured mortgage loans. Since then, a federal regulator has controlled their financial decisions.

Taxpayers have spent about $169 billion to rescue Fannie and Freddie, the most expensive bailout of the 2008 financial crisis. The government estimates that figure could reach up $220 billion to support the companies through 2014 after subtracting dividend payments.

Fannie has received $112.6 billion so far from the Treasury Department, the most expensive bailout of a single company.

Michael Williams, Fannie’s president and CEO, said Fannie’s losses are increasing for two reasons: Some homeowners are paying less interest after refinancing at historically low mortgage rates; others are defaulting on their mortgages.

“Despite these challenges, we are making solid progress,” he said. For example, Fannie’s rate of homeowners who are late on their monthly mortgage payments by 90 days or more has decreased each quarter since the beginning of 2010, he said.

When property values drop, homeowners default, either because they are unable to afford the payments or because they owe more than the property is worth. Because of the guarantees, Fannie and Freddie must pay for the losses.

Fannie said lower mortgage rates contributed to $4.5 billion in quarterly losses. While those losses are large, they are temporary and should ease in future earnings reports, said Mahesh Swaminathan, mortgage strategist at Credit Suisse.

“They are accounting losses on their books rather than economic losses,” he said.

Fannie’s July-September loss attributable to common shareholders works out to $1.32 per share. It takes into account $2.5 billion in dividend payments to the government. That compares with a loss of $3.5 billion, or 61 cents per share, in the third quarter of 2010.

Last week, Freddie requested $6 billion in extra aid — the largest request since April 2010 — after it reported losing $6 billion in the third quarter.

Washington-based Fannie and McLean, Va.-based Freddie own or guarantee about half of all mortgages in the U.S., or nearly 31 million home loans. Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.

Fannie and Freddie buy home loans from banks and other lenders, package them with bonds with a guarantee against default and sell them to investors around the world. The companies nearly folded three years ago because of big losses on risky mortgages they purchased.

The Obama administration unveiled a plan earlier this year to slowly dissolve the two mortgage giants. The aim is to shrink the government’s role in the mortgage system, remaking decades of federal policy aimed at getting Americans to buy homes. It would also probably make home loans more expensive.

Exactly how far the government’s role in mortgage lending would be reduced was left to Congress to decide. But all three options the administration presented would create a housing finance system that relies far more on private money.

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Unguaranteed Fannie Bonds May Yield Double-Digits

•November 9, 2011 • Leave a Comment

Approach to spread credit risk is based on Freddie multi-family securitizations

By Ronald D. Orol, MarketWatch

A proposal floated by the Obama administration and Freddie Mac to induce private mortgage investors back into the single-family loan industry likely would need to offer double-digit yields to entice buyers, analysts say.

The approach, which is still in the conceptual study phase, would have Freddie Mac and Fannie Mae, the two government-seized mortgage giants, sell single family mortgage securitizations of which a small slice — 5% or 10% — would be sold without a government guarantee. Investors buying the subordinated security would be the first to take a loss if mortgages in the package default. To attract these investors, Freddie and Fannie would need to offer a higher yield.

“Because there is still a lot of risk aversion in the market and people are still reluctant to put capital to work right now, they would need to be offered 10% or even higher yields to buy unguaranteed securities,” said Chris Flanagan, head of U.S. mortgage and structured finance research at Bank of America Merrill Lynch.

“There are people out there who are willing to do that sort of investing, not as many as those who would buy the guaranteed securities, but there are people who know mortgage credit well and would buy it for a 10% or greater yield,” he added

Regulators are considering the approach because of the success of an existing program that Freddie Mac has employed to sell some multi-family mortgage securities without a government guarantee.

The goal of the new approach would be to begin the process of defrosting the private-label single-family mortgage securities market, which has been all but frozen and unable to function since the financial crisis of 2008.

Outgoing Freddie Mac CEO Charles Haldeman said Oct. 11 at a Mortgage Bankers Association conference in Chicago that he hopes to use the firm’s multi-family mortgage securitizations as a template for attracting private capital to the single-family mortgage securities market.

Freddie Mac has completed 17 of these multi-family securitizations since June 2009 with a value of $18.7 billion, of which $16.4 billion was guaranteed and $2.3 billion carried no government guarantee.

David Brickman, senior vice president for multi-family mortgages at Freddie Mac, said the mortgage giant has had strong demand with multi-family securitizations, in part, because investors have seen extremely low delinquency rates with only 0.3% with the loans defaulting on average.

“We’ve had one of the best portfolios in the industry and the lowest delinquency rates on our multi-family loans,” Brickman said.

He noted that the subordinate slice of the securitization that is not guaranteed by Freddie comes with a much higher yield in the “teens”and that investors in those securities who specialize in these apartment securities really understand the investments. Freddie Mac now has a list of roughly 100 potential buyers for the ‘securitizations’, Brickman said.

“The folks who invest in that [subordinated un-guaranteed] class are given a substantial amount of property-level information to help them assess the investment and they frequently visit the properties in the pool. The yields on those are typically in the teens,” he said. “They are frequently real estate investors and private equity funds who look for that high yield.”

He noted that some of the slightly less subordinate unsecured, mezzanine, bonds typically come with a 5% to 6% yield and are often purchased by insurance companies, hedge funds and some high-yield funds managed by conventional money managers.

Mike McMahon, managing director at Redwood Trust Inc., a publicly traded real estate investment trust, said buyers would come for the unguaranteed tranches if yields are high enough.

“If mortgage credit investors are persuaded that the collateral is clean and it is well underwritten and provides an equity-like return, then there will be a lot of buyers,” said McMahon.

Since the crisis began Redwood has come to the market with three private-label residential mortgage-backed securities transactions, in sizes of $238 million, $295 million and $375 million, respectively.

Manoj Singh, formerly senior vice president of pricing and securitization at Freddie Mac, says investors are willing to take the credit risk on new single-family mortgage securities for a high yield because these loans are typically made with tight underwriting standards and will have low default rates.

“These securitizations will be made up of new originations from borrowers with pristine credit, high credit scores, and high-yield investors will be willing to take that risk,” said Singh. “The interest rate they receive will be a few percentage points above the securities with a guarantee.”

Flanagan said default rates will not be as low as with the multi-family securities, but they will still be low. He points out that high-yield investors would be interested in buying some of these unguaranteed securities for such a high yield because traditional guaranteed mortgages securities are offering such a low yield.

“In today’s environment, there is no yield left in easy, liquid government securities,” Flanagan said.

Flanagan said that Fannie and Freddie will need to ease into such a new securitization market carefully and probably only issue roughly $10 billion in unguaranteed securities a year at the beginning, a small piece of the total mortgage market. Fannie and Freddie own roughly $1.4 trillion in mortgages and mortgage-backed securities, as of June, according to the agency.

Ajay Rajadhyaksha, chief of U.S. fixed income research at Barclays Capital in New York, in September told senators at a banking committee hearing that such an approach would work. He said the new securitizations would be critical to revive the stagnating private mortgage market because they would create a price for private mortgage securities, driving investment.

“The single most important reason to sell Freddie and Fannie credit risk is to establish a benchmark against which the private sector can price mortgage credit,” Rajadhyaksha said. “At the very least, investors would be able to have a better sense of what they should be paying for new purchases in the private label mortgage markets, encouraging primary issuance.”

Bose George, analyst at Keefe, Bruyette & Woods in New York, said that creating these kinds of securitizations could help revive the private mortgage market in the near term, while other efforts to do so, such as sweeping restructuring of Fannie Mae and Freddie Mac, will take years.

“Even if it is a modest program it will be putting some private capital into the mortgage market rather than waiting for Fannie and Freddie reform which will take much more time,” George said.


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