If the mortgage market builds a structure supported by private capital, institutional investors will come.
The “Field of Dreams” concept seems like a broadly accepted approach.
While, Tom Deutsch, executive director of the American Securitization Forum, admitted to members of the Senate House Finance Services Committee during a panel Friday that investors are chomping at the bit to get back into the secondary mortgage market, too many headwinds are keeping them at bay.
“Timing of change is a big factor related to any transitions within the government-sponsored enterprises,” Deutsch explained.
He added, “No investor wants to see some Maverick trying to land an aircraft carrier immediately. It’s a massive plane you’re trying to land, so it has to have a long landing strip to get the job done.”
While many investors are adamant about using private-capital to take the first-loss of credit risk with some government backstop, many refuse to put their finances on the line unless three criteria are properly met: pricing, terms and certainty of the terms.
To put it simply, investors are not willing to fund residential mortgage-backed securities unless concrete terms are in place — such as representation and warranties — and, as a result, there is a definite understanding of the terms set to ensure a proper return on such investments.
Another issue preventing investors from a quick return to the private securitization market is the challenges created by eminent domain proposals in local jurisdictions, Deutsch noted.
While the housing crisis brought a lot of short-term pain, the long-term effects include massive equity depreciation across the country.
Investors more recently starting going after the low-hanging fruit and turned some of the hardest-hit markets positive, particularly Las Vegas and Phoenix.
Private capital is functioning in these housing markets since investors are not having to compete with government control. However, all of that is changing with municipalities considering eminent domain programs.
“To be frank, investors feel ripped off with the current eminent domain program,” Deutsch said. “If I lend you money and you rip me off, I’m not going to make that same investment again.”
The current mortgage finance system does not provide concrete terms due to the uncertainty of which direction Fannie Mae and Freddie Mac are heading.
As a result, a common consensus echoed throughout the room by panelists was the need for Congress to provide a clear and common end point for the enterprises.
“Several of the steps current acting director Ed Demarco of the Federal Housing Finance Agency has taken are constructive, but not enough transparency is happening,” said vice president of single-family research and policy development for Mortgage Bankers Association Mike Fratantoni.
He added, “The director of the FHFA cannot provide the same amount of certainty to the market that Congress can.”