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RMBS investors warn on long-term hazards of shutdown

Issuers refuse to carve back requirements on certain government docs

Congress may be inching toward a resolution that will effectively end the government shutdown, but participants in the mortgage market are running out of patience and beginning to worry.

The latest segment to sound the alarm is tied to the issuance of jumbo residential mortgage-backed securities, which are not immune to shutdown concerns.

While the underwriting guidelines of most lenders only require a signed and dated transcript of tax returns from the borrower for the closing file, many investors who buy RMBS require the actual tax transcripts, Kroll Bond Ratings noted.

However, with the Internal Revenue Service temporarily frozen amid the federal shutdown, investors are facing the same challenges as title insurers and lenders since they are unable to provide proof of tax transcipts.

"Most issuers have said they will not change their investor guidelines and will continue to require transcripts," explained Kroll analysts Michele Patterson and Glenn Costello.

A prolonged shutdown could cause jumbo originations to signficantly drop since lenders with no ability to hold mortgages on their balance sheets will be forced to stop production, Kroll analyst Kathleen Kennedy said. The only exception to this would be a situation in which an investor loosens their guidelines to accept mortgages without tax transcripts, Kennedy added.

One issuer even went as far to say that it hopes "the government is up and running before lenders have exhausted their pipelines, and the effect is minimal."

Although many investors believe the government shutdown is an issue for the mortgage industry, all agree it’s too early to tell if volume will be impacted. 

The past couple of months have been a constant challenge for mortgage players, especially after the Federal Reserve confused the markets by saying it would not taper its bond-buying program after subtly suggesting it would.

When you couple that issue with the debt ceiling debate and government shutdown, market volatility is an obvious outcome, analysts note.

While the duration of the government shutdown is still unknown, the length of it will determine the potential impact on title insurance companies’ margins, according to a recent report by Fitch Ratings.

"Title insurers are sensitive to macroeconomic factors such as employment levels, consumer sentiment and interest rates, and therefore the duration of the shutdown is a vital factor in determining its affect," explained Fitch Ratings directors Gerry Glombicki, Dafina Dunmore and Kellie Geressy-Nilsen.

Overall, the longer the government shutdown lasts, the more likely it is to impact volume, profitability and overall market operations.

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