Treasury asks you how to revive “dormant” private label RMBS market

Pushes for return of private capital to ease credit crunch

In a speech Thursday at the Making Home Affordable five-year anniversary summit, U.S. Treasury Secretary Jacob Lew announced several initiatives designed to provide a boost to the struggling housing market.

One of the specific issues that Lew singled out was the difficulty many credit-worthy borrowers are having obtaining a loan.

“We need to develop new solutions for credit-worthy families who want to buy a home but continue to get rejected by lenders, Lew said. “There are still millions of Americans with good credit who cannot get a mortgage. We have to do more to make sure our markets are effectively serving potential homebuyers.”

One way to do ensure easier access to credit is by bringing private capital back into the market. “The fact is, we need to attract more private capital to the housing market,” Lew said. “The private label securities market has been dormant since the financial crisis.”

Lew said that the Treasury is hoping to “foster the development of a safe and sustainable private market for mortgage lending that can serve alongside government-supported options,” by working with investors and securitizers to “uncover new paths to increase private investment.”

As part of that plan, Lew said that the administration also plans to host a series of upcoming meetings with investors and securitizers to further explore ways to increase private lending. “We are already working with the regulators to put in place reforms that will improve underwriting standards, increase risk retention, and help ensure sound market practices, which we believe will address the flaws in the securitization and lending practices that played a role in the financial crisis,” the Treasury said in a statement.  

“As this framework comes into place, we believe that an expanded role for the PLS channel can responsibly broaden access to mortgage credit for qualified borrowers who are not being served today, while helping protect taxpayers by shrinking the government’s footprint in the housing market.”

Lew also said that the Treasury will be seeking input from “all interested parties, including market participants, stakeholders, community groups, and industry observers” on how to revive the private market.

“As part of this effort, we are posting questions on our website today intended to help us better understand what we can do to encourage a well-functioning private securitization market,” Lew said.

In the Treasury’s “request for comment” posted to its website, it asks for public comment on nine private market-related questions. Those questions are:

1. What is the appropriate role for new issue PLS in the current and future housing finance system? What is the appropriate interaction between the guaranteed and non-guaranteed market segments? Are there particular segments of the mortgage market where PLS can or should be most active and competitive in providing a channel for funding mortgage credit?

2. What are the key obstacles to the growth of the PLS market? How would you address these factors? What are the existing market failures? What are necessary conditions for securitizers and investors to return at scale?

3. How should new issue PLS support safe and sound market practices?

4. What are the costs and benefits of various methods of investor protection?  In particular, please address the costs and benefits of requiring the trustee to have a fiduciary duty to investors or requiring an independent collateral manager to oversee issuances.

5. What is the appropriate or necessary role for private industry participants to address the factors cited in your answer to Question #2? What can private market participants undertake either as part of industry groups or independently?

6. What is the appropriate or necessary role for government in addressing the key factors cited in your answer to Question #2? What actions could government agencies take? Are there actions that require legislation?

7. What are the current pricing characteristics of PLS issuance (both on a standalone basis and relative to other mortgage finance channels)? How might the pricing characteristics change should key challenges be addressed? What is the current and potential demand from investors should key challenges be addressed?

8. Why have we seen strong issuance and investor demand for other types of asset-backed securitizations (e.g., securitizations of commercial real estate, leveraged loans, and auto loans) but not residential mortgages? Do these or other asset classes offer insights that can help inform the development of market practices and standards in the new issue PLS market?

9. Is there any additional information regarding the PLS market not already addressed that you would like to provide?

Comments are due by August 8.

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