Fannie Mae and Freddie Mac have been the primary drivers in the secondary market over the past couple of years. However, an emerging number of private investors are expected to return to the market or in some cases dip their toes into the water for the first time, senior executive Ghazale Johnston of Accenture Credit Services told HousingWire.
In light of the evolving market conditions, increased confidence in the real estate market and the quality of loans by lenders in recent years, private investors are finding the secondary market more appealing for the first the time in years.
“I think that it’s very fair to say that we would see a lot of private equity or hedge funds who have already demonstrated interest or success in the mortgage business want to expand their focus,” Johnston said.
She added, “In some cases you’re going to see more of the traditional investment banks who had a footprint in this space previously are going to want to probably move slowly back into it.”
The increase in the quality of loan production, better economics and risk management at a different place than previously are expected to be the key factors that will drive investment banks back into the market.
While it‘s “gigantic stretch” to say that any other entity in the market could fill the void of both government-sponsored enterprises — given the size, scale and complexity — the private investor community is going to add competition.
“What we’ve seen over the last few years was a non-existent private investor community and that is where I think you’re going to see an increase in it – it will no longer be nonexistent,” Johnston said. “Those who haven’t necessarily played in this space now see an opportunity to make their mark and get in there.”
The secondary market is more appealing to investors now due to an increased effort to improve the quality of institutions and the both GSEs producing and lower loan defects. As a result, there’s a growing confidence by private investor players. It would be a huge confidence boost to the housing economy if these investors began to return in force.
“They’re saying, ‘if we were to get back into this space, we can feel a lot better that the loans being produced now are going to meet regulatory standards and they’re going to have better quality and output,'” Johnston said.
Also the increased competition in the secondary market will provide more appeal for originators because it provides alternative sources, making the market more attractive.
“I think it just bolsters their own confidence in the marketplace and it’s hopefully an economic advantage for them, as well, that they can figure out in some cases how to improve their business model,” Johnston said.
Accenture Credit Services works with the top 20 originators and servicers in the market by providing consultations, technology and outsourcing services.