What is the state of the residential mortgage-backed securities market going into 2014?

Everything is on hold awaiting government action and new rules that won’t be coming anytime soon, and when they do come they may not be welcome.

Volume is way down in the issuance of privately backed RMBS, even as there seems to be no plan forthcoming to bring private capital back and no real momentum in extricating the government from the GSEs.

The GSEs currently guarantee nine in 10 new mortgages because of the lack of private capital coming into the space.  

"The government should get out of our business," said Vincent Fiorillo, global sales manager at DoubleLine Group said.

Indeed, many in the industry expect that the new direction at the Federal Housing Finance Agency (FHFA) will bring more emphasis on fair housing policies, rather than GSE reform.

Further, there is ongoing concern about how ability-to-repay, risk retention and the new QRM rules will affect the private-label RMBS market. While still in development, the latest version of QRM is considered a decent compromise. The new version under consideration adopts the restrictions in the QM and this alignment is seen as a positive.

The private-label RMBS market will see more issuance in 2014 than 2013 – which saw $15 billion in new issues – owing to regulations that continue to stifle issuance, said Kevin Duignan, global head of structured finance at Fitch Ratings.

While the market is becoming slightly more welcoming since it got the cold shoulder after the 2008 crisis, it’s far from its historic, if artificial, highs.

"Institutional investors and issuers haven’t reached any consensus on the appropriate balance of liability and protection," said Kruti Muni, senior vice president and manager at Moody’s Investment Services.

And until one or another GSE reform plan comes into focus, no serious growth should be expected, much less the historic highs in excess of $725 billion almost a decade ago.

 "A consensus is slowly emerging as to what the new system should look like. It’s easier to agree on general framework, rather than the plumbing," said Laurie Goodman, director at Housing Finance Policy Center at the Urban Institute.

Asked her prediction as to when GSE reform would be accomplished, Goodman answered that her prediction was that she’d be sitting on a similar panel in 2017 being asked when she thought GSE reform would be accomplished.

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