The mortgage market, once reforms take hold, will mainly be within the purview of big banks originating highly standardized loan products, according to a new research report from FBR Capital Markets
But both big and small banks will see profits margins squeezed as servicing fees drop and guarantee fees rise, FBR said in a new research report.
"[W]e believe that the large money center banks that benefit from economies of scale, like Bank of America (BAC)
and Wells Fargo (WFC)
, are the best positioned to weather the regulatory and economic changes while small originators and servicers will likely find it hard to compete under the new rules," FBR said in a report authored by Paul Miller and four others. On the mortgage insurance side, the degree to which companies will be impacted remains unclear, it said.
FBR said it expects Fannie Mae
and Freddie Mac
to be replaced by "multiple privately capitalized, government-sponsored securitizers with the government supplying a backstop (for a fee) for credit and duration risk." Government involvement will contract in normal market conditions and expand in difficult times. As a result, the private market share of the mortgage market will rise, FBR said.
The firm said it expects mortgage rates to rise while homeownership levels will shrink as the focus shifts to affordable rental housing.
In 2010, 54% of all outstanding mortgages and 92% of mortgages originated in the U.S. were bought by Fannie Mae and Freddie Mac, according to FBR, as investors shied away from securities that were not government insured. Together, Fannie and Freddie insure roughly $5 trillion of all outstanding mortgage-backed securities, up 32% from 2006.
The Dodd-Frank Act requires securitizers to retain a 5% credit risk in all assets they securitize if they do not meet the standard of a "qualified residential mortgage" or QRM.
What happens with the QRM will occur long before GSE reform. Regulators are currently hammering out the definition of a QRM. Because QRMs are likely to be less expensive to originate and to securitize, there will be an economic incentive to make loans that fit the QRM definition.
The QRM definition will impact the mortgage insurance industry immediately, but over the long term the QRM will also "ultimately define the main mortgage products originated in the United States," the report said. Although GSE reform is expected to take years, the QRM rules are supposed to be implemented by April, assuming they are not delayed.
"We believe that the final definition of QRM will either be: (A) broad and establish a 5% minimum
down payment as long as the loan also has mortgage insurance or (B) allow loans securitized through Fannie Mae and Freddie Mac (while in conservatorship) to effectively be exempt
from risk retention. We believe it is likely that the rules will also include some new standards for servicing."
Although the GSE debate is still in its infancy, FBR said it ultimately envisions "a mortgage market in which there is sustained, but more moderate government support, multiple government-sponsored entities (GSEs) that insure mortgages, a lower level of homeownership, and a 30-year fixed-rate mortgage that is alive and well."
Write to Kerry Curry
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