Private-label securities market languishes at 90% off peak

The Urban Institute's PLS progress report

The private-label securities market stands nowhere close to where it used to over the past eight years. The Urban Institute addresses in a blog what’s going on in the PLS market, along with the areas that need still need a lot of groundwork in order to revive the market.

The blog explains that the PLS market is securitization of mortgages with no government involvement.

The PLS markets pales in comparison to its prior demand  — so much so that new prime securitization was just $12.1 billion in 2015; less than 9% of the $142 billion in 2001, the blog said.

Further, the blog said that private-label securitization of newly prime, Alt-A, and subprime mortgages totaled $13.7 billion in 2015, versus $240.6 billion in 2001.

The Urban Institute sees three main goals as essential to revive the market:

  1. The introduction of a deal agent to look out for investors’ interests
  2. Standardization in PLS documentation
  3. Servicing improvements

While the Urban Institute said that reform efforts have made considerable progress on the first two goals, the third has only shown moderate progress.

Here’s why the Urban Institute is urging change:

The failure to restart the PLS market could have a much deeper and more problematic impact should policymakers ultimately decide to pull back on the government’s role in the market, as many housing policy reformers have proposed. If this occurs, and banks do not step up, creditworthy borrowers with conforming loans will face both higher rates and credit availability issues.

A lot of the discussion surrounds deal agents, who are charged with looking out for the interests of investors.

The Structured Finance Industry Group has developed a comprehensive list of all roles and functions and who will play each role within an RMBS 3.0 transaction.

Because of the work being done under Treasury’s PLS initiative SFIG chose to focus exclusively on functions; it did not address the deal agent’s scope of liability (duties of care and loyalty).

In short, while there has been huge progress, many operational issues remain to be resolved. While market participants generally agreed that this role would be very valuable on less-than-prime deals, some have doubts about whether a deal agent is cost-effective in prime transactions. This number may grow or shrink depending on the costs of the deal agent in the first few deals.

As for the solution to revive the PLS market, here is what the Urban Institute concludes:

The development of the deal agent concept and the recommendations to bring more standardization to PLS documentation are important steps forward in the revival of the PLS market. But more work needs to be done to refine and implement these principles. 

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