Mortgage Modifications Drive Lack of Private Investor Demand
The Obama administration's bailout plans and stimulus packages are working to keep the economy from collapsing, but also create an environment where private investors in the securitization market are reluctant to come back to the sector en masse. During a panel at the American Securitization Forum 2010 in Washington, titled "Restoring the Private Securitization Market and Unwinding Government Support Programs," moderator Karen Weaver, global head of securitization research at Deutsche Bank (DB) asked: "Do you think the [securitization] market is ready for the [government's] exit?" Ish McLaughlin, a managing director at Citigroup (C), said the investor base appears smarter and more understanding of the securitization landscape, though the investor base is significantly deteriorated. "80 percent of volume is bought by 20 percent of the investor base," he said. "It's too narrow a base to build a house on. And, if you can't get your hands around the product now, you probably aren't going to get you hands around it." Paul Colonna, president of fixed income at General Electric Investment Corporation added that the homebuyer tax credit helped stimulate the market, but it is no longer needed as long as banks get recapitalized in order to begin offering credit in a meaningful way. "We have to start thinking about what the exit looks like. We'll see rates rise, but at the end I don't think rates are the problem," Colonna said. "Loan mods are a big issue, you won't see investors back in the market until we see what will happen with this." McLaughlin added that the money is there for creating a private market securitization market. HousingWire sources previously indicated a new private-label residential mortgage-backed security (RMBS) issuance could come by mid-2010. When private-label RMBS does come back to market, it will have to stand up under significant review. The industry is undergoing a sweeping reform of due diligence in order to increase transparency in the securitization process. New initiatives, like those in risk-management firm Allonhill's new due diligence platform, include the ASF's universal Loan Identification Number Code (ASF LINC), which tracks characteristics of individual loans within securitization. John Kiff, a senior economist for the International Monetary Fund, at the ASF today also floated the idea of creating a covered bond market in order to lure investors back into the space. Covered bonds are the oldest structured finance product in the market. The bonds are backed by a dual recourse structure whereas the issuer of the bonds is on the hook to investors to pay-out if the related collateral, in this case mortgages, see widespread defaults. The added “cover” is pricey, but attractive to a risk-averse investor base. A US dollar-denominated covered bond issue out of Canada last week shows some signs US investor demand for covered bonds is strong. The issuance comes as new legislation seeks to pave the way for covered bonds trading within the US. The proposed legislation indicated covered bonds may be breaking the cloud cover within the US, where no legal framework yet exists for covered bonds. Write to Jacob Gaffney. Diana Golobay contributed to this report.