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Wells Fargo looks at private mortgage bond issuance

ABS East 2013: Mortgages need to shield issuers from "manufacturing defects"

The private market for mortgage securitization remains quite small, and that won't change unless the interests of issuers and investors are aligned.

For Wells Fargo (WFC), once a massive issuer of private mortgage-backed securities, there are plans to put together a new series of RMBS, but many conditions need to be satisfied first.

At a panel at the ongoing ABS East 2013 conference underway in Miami, speakers discussed what it will take to bring back private issue RMBS in force — without the risks found in deals issued in 2006 to 2008.

Eric Kaplan, managing director at smaller RMBS issuer Shellpoint Partners, said he felt the recent Fannie Mae and Freddie Mac risk-sharing deals won't work in the private space. The news is riveting considering that some argue the deals are structured in order to ease private investment back into the trillion-dollar space.

"Investors are staying on the sidelines, they are vocal and clear about what it will take to get them to come back in," Kaplan said. "Let's get the issues on the table."

One of these issues is hedging investors from risks created during the mortgage origination process. He referred to this as "manufacturing defects" borne out of the lending process.

This prompted fellow panelist Larry Rubenstein, managing counsel at Wells Fargo, to explain that the big lender is looking to restart its private mortgage bond issuance. However, two preconditions must be met before a large financial firms return to issuance, Rubensten suggested.

The first is getting comfortable with regulatory changes. In order to play by the rules, one must know the rules. And there is promise in this regard. Rubenstein said the recent finalization of Consumer Financial Protection Bureau rules is largely positive. 

The second issue is to create mortgage bond series structures that are scalable and repeatable.

"We're spending a lot of time focusing on how that can happen to focus on us as an originator and a securitizer," Rubenstein said.

This success will come with continued due diligence in the front, of the structure finance process. And in back end, independent reviewers will be necessary to perform regular audits.

"We need to have better standards for valuation," he said. "If there is a question of the comps three to four years previous, is there a better may to know that? " Rubenstein asked. "We're thinking that we need to focus on what known as a manufacturing defect."

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