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* Residential lenders setting sights on non-GSE lending
* RMBS industry mulls way to self regulate
* Economics of securitization still unattractive
By Joy Wiltermuth
NEW YORK, May 2 (IFR) - Private capital is once again poking
around opportunities in residential mortgage lending, but with
some new RMBS originators looking for a change from the good
old, bad days.
One such idea is for a new investor oversight role to be
stamped into each new private label transaction, an attorney
told IFR. Pacific Investment Management Company, with US$1.94trn
assets under management, is said to be among the potential
anchor bond buyers mulling the option.
The watchdog position would likely revolve from
deal-to-deal, but would also look to draw upon a big firms' due
diligence capabilities to attract other investors to the
still-stifled private RMBS space.
Representatives from Prudential Financial, MetLife and
BlackRock all spoke on panels this week focused on ways to
revive investor confidence in the RMBS market. Standard & Poor's
held a session Monday, while CoreLogic held a second summit on
The expectation has been that private securitisations will
fill some of the void left when regulators dial back the
government sponsored entities' 80% mortgage market presence,
even though prospects for a quick overhaul of mortgage giants
Freddie Mac and Fannie Mae dimmed this week.
A 22-member US committee delayed its vote to move forward
to secure full Senate support for the bill set forth by Senators
Tim Johnson and Mike Crapo.
"You can't just have issuers or rating agencies or servicers
designing the new model for RMBS," said Chris Haspel, head of
capital markets at Fenway Summer.
NEW NON-QM PUSH
Fenway Summer, an advisory and investment firm founded by
Raj Date, the former US Deputy Director of the Consumer
Financial Protection Bureau, is one such firm making headway. In
April, it merged its mortgage originator arm with agency
originator Ethos Lending, the name under which it will operate.
Its plan is to start originating GSE-eligible qualified
mortgages, and to move into high-quality, prime and super prime
loans that fit outside of the "QM" box and are not saleable to
the GSEs, once momentum builds.
That could mean interest-only loans to borrowers with good
FICO sources, and loans to high credit borrowers with
debt-to-income ratios above the 43% threshold. Ethos Lending
will ultimately want to securitise, selling the senior bonds
while retaining the bottom of the credit stack.
Before that happens though, private label Triple As need
better liquidity and a competitive edge on pricing. Private RMBS
Triple As are generally 2.5-3 points lower than equivalent
coupon Fannie MBS securities, said Trez Moore, managing director
at Royal Bank of Scotland, speaking at the CoreLogic conference.
As its stands now, only agency MBS and risk-sharing GSEs
deals are highly liquid as they trade with an implied full US
Others firms, including banks, are also looking at non-QM
lending, particularly to high-net-worth individuals, but with
the likely intention of holding these loans on their balance
sheets, Moore said.
That's because banks get more favourable treatment for
holding loans in unsecuritised rather than securitised format
under Basel III, even though the later offers credit enhancement
through subordination and other structural features.
"There is a lot of talk, but right now little-to-no desire
to securitise these assets," Moore said.
EYES ON US$100bn OPPORTUNITY
Private capital currently represents only a sliver of the
roughly US$20trn housing stock in the US, according to Laurie
Goodman, director of the housing finance policy centre at the
Equity accounts for about half of that total. But on the
debt side, the GSE market tally is 56%, with non-securitised GSE
balance sheet loans representing another 5%.
Loans in portfolios of depository institutions make up 24%,
private-label 8% and second liens 7%. But even with GSE reform
likely on the backburner for the next couple of years, the
annual non-QM lending opportunity is still estimated to be
sizeable, at roughly US$100bn.
That's why market participants are gearing up for deals.
Limited staffing on the buyside remains a problem for the
private-label market, which was reopened by Redwood Trust in
2010. Even the world's largest firms find it difficult to
dedicate resources to sift through 400-page deal documents to
ferret out unloved clauses, a source at one of these firms said.
Still, they are keen to avoid previous mistakes. Among their
chief concerns is that documentation still goes too far to limit
the liability of originators, even though post-crash RMBS deals
have improved in terms of more robust pre-sale disclosures and
That speaks to other potential facets of the anchor-investor
role, which also could include enforcement powers like removing
a deal's servicer and monitoring its collateral performance.
This is not the only change on the table.
Private lenders, including Shellpoint Partners, have been
working to re-write the structure of new deals. To do so, it has
brought together investors, originators, rating agencies and
data firms to draft a "perfect" RMBS trust.
The rough outline includes an enforcement mechanism for
representations and warranties breaches, embedded due diligence,
better data and disclosures and transparency across deals.
"We do want to avoid what we just went through," said Eric
Kaplan, managing director of mortgage finance at Shellpoint.
(Reporting by Joy Wiltermuth; Editing by Anil Mayre and Natalie