Redwood Trust (RWT: 11.55 -0.86%) CEO Martin Hughes said his company is still on track to issue two new private-label deals in 2011, but the government's dominance and regulatory uncertainty keep the entire market from restarting.
Since the credit markets froze in 2008, the private-label MBS market lay dormant. Redwood closed one jumbo RMBS deal in 2010 and another in early 2011. But 90% of new mortgage originations rely on support from either Fannie Mae, Freddie Mac or Ginnie Mae.
"The consequences of failing to attract sufficient private-sector capital to this market include a contraction in the availability of credit to homebuyers, an increase in mortgage rates, and continued decreases in home prices," Hughes said in testimony before the Senate Banking Committee Wednesday.
Hughes said more investors are waiting to enter the market until the uncertainty is solved. Regulators proposed a rule in March under the Dodd-Frank Act requiring issuers to hold 5% of the risk on securities. Hughes said this rule and more disclosure will be essential to getting investors off the sidelines, but he added the problem isn't as complicated as the new regulation intends it to be.
"The best way to hold skin in the game is the horizontal slice. Our sales pitch is 'We put this deal together. We're selling you securities and we're holding 5% of the securities underneath you, and 100% of that will be used up before it reaches you,'" Hughes said. "I think that and new disclosures for investors is enough to restart the market."
Association of Mortgage Investors Executive Director Chris Katopis said investors are ready, but they need new disclosures. Such a lack of information permeated the entire securitization market, he said.
"Our investors are very good at pricing risk, but they cannot price the unknown," Katopis said.
Hughes said the private-label market needs enhanced disclosures, strong and enforceable representation and warranty agreements, and more skin in the game from borrowers.
But borrowers don't have to see prices skyrocket. For the latest deals by Redwood, the interest rate on loans backing the securitization was 46 basis points higher than the government-guaranteed rate. As more loans become available for private-label RMBS deals, the mortgage rates could rise by less than 50 bps.
Safer loans can be written, loss rates can return to historic norms, and private capital can fund lower-interest loans, Hughes said.
"The first step is to give the private sector a chance by following through on the administration’s plan to reduce the conforming loan limits and increase the GSE's guarantee fees to market rates at a safe and measured pace," he said.
Write to Jon Prior.
Follow him on Twitter @JonAPrior.
