Before mortgage investors push too hard for a private investment capital comeback, members of the House Financial Services Committee are challenging the idea of a completely transformed market until investors regain confidence.
While members of the committee and panelists testifying before them Wednesday all said they want an even playing field for private investors, from a monetary standpoint, there’s not enough private capital to take over the government-dominated $10 trillion market, panelists suggested.
What is holding the private sector back? Investors.
"The problem is the risk posed by private investment capital to investors. They aren’t convinced that the market has stabilized enough or is sustainable," said Martin Hughes, CEO of Redwood Trust (RWT) — the only issuer dealing out monthly private-label residential mortgage-backed securities deals.
Even so, the deals being priced by Redwood are extremely cushioned, which doesn’t pose any significant amount of risk to the investor.
"I can guarantee you that if we had another financial crisis, Redwood would not lose a single dime on any of its deals because of the cushion they’ve put in place," claimed James Millstein, chairman and chief executive officer of Millstein & Co. Millstein is credited with the restructuring of AIG in the wake of the financial crisis.
It’s the same song, different dance for the market – private capital needs to come back into the mortgage industry, but nothing can be done until Congress finalizes the role of the government-sponsored enterprises.
"I believe that private capital wants to come back and will come back, if the government would only step out of the way and let it," said Congressman Scott Garrett, R-NJ.
Nonetheless, members were well aware that bringing private capital back into the market is going to be a gradual process. But the main issue will be convincing investors to take a stake in the credit risk.
"Investors are good at pricing risk so for them to step back into the market, they would need more transparency as well as other issues addressed before they can step back in," said Chris Katopis, executive director of the Association of Mortgage Investors.
While credit investors are expected to make a gradual return back to the market, members of the committee wanted to know how long this comeback would be, or if the return of private investment capital will take place at all.
"It took 20 years for the government sector to get this big as savings and loans went out of this business. I think that transition to private investment could be that long, but if we never start to make that transition it will never happen," Millstein cautioned.
While the private capital takeover may never reach the peak period of $3 trillion in mortgage-backed securities issuance, securitization is in a class of its own.
Thus, there’s still market appeal for the private sector.
"The securitization market creation was a proper matching of assets and liabilities in the system. There’s something fundamentally good about the business because it diversifies credit risk," Millstein concluded.