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Investments

Moody's: Johnson-Crapo could ramp up issuance of private-label RMBS

See positive potential in Senate GSE reform measure

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The Johnson-Crapo housing reform measure is slated for markup April 29, and a report by Moody’s Investors Services says the GSE package could help kick-start issuance in the private-label residential mortgage-backed securities.

Johnson-Crapo is one of three primary GSE reform measures on the Hill. The other two primary contenders are the House’ PATH Act and the Senate’s Corker-Warner. HousingWire has this side-by-side breakdown of the three measures. In late March, U.S. Rep. Maxine Waters, D-Calif., unveiled her own GSE reform plan, the HOME Forward Act.

The Senate measure, introduced by Senate Banking Chairman Tim Johnson, D- S.D., and Sen. Mike Crapo, R-Idaho, has been both praised and criticized by the industry, and its fate could rest in large measure onmid-term elections.

Moody’s says that under the framework proposed in Johnson-Crapo, fewer residential mortgage loans would be eligible for inclusion in government-guaranteed securities because of changes in criteria establishing which securitizations can receive government guarantees.

“Under the bill, a new agency, the Federal Mortgage Insurance Corporation (FMIC) would provide a government backstop for eligible mortgage pools that have secured a private first loss piece of 10% through FMIC-approved risk-sharing mechanisms,” says Moody’s vice president Sang Shin.

Loans would only be eligible for the FMIC backstop if they meet the Consumer Financial Protection Bureau’s Qualified Mortgage standards, among other requirements. These standards would be more stringent than the GSEs’ current eligibility criteria, which do not mandate that loans meet QM standards to be eligible for securitization.

Moody’s says that more issuance would likely result as well, both in the private-label and government-guaranteed securitization markets from the introduction of a common securitization platform, as outlined under the legislation.

More issuance could also occur “If the new system gives investors added confidence in the securitization market as a result of increased transparency and standardization and encourages originators or aggregators that had been on the sidelines to participate in the secondary securitization market,” Sang said.

Investor uncertainty regarding the wind down of the GSEs and its impact on mortgage rates as well as the bill’s provision keeping the existing conforming mortgage loan balance requirements could create some headwinds.

“The conforming loan provision is a shift from the Obama administration’s stance and previous housing reform proposals such as the bill introduced last year by Senators  Corker and Warner,” Sang said. “Maintaining the existing maximum conforming loan balance would limit the potential increase in private-label RMBS issuance.”

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