Mortgage market of the past may hold some clues for the future

James Hagerty of the Wall Street Journal hosted a session on the future of America’s mortgage market this week at the MBA Secondary Conference in New York. 

The title of the session and the majority of the discussion assumes in some way that the mortgage market needs to be different than it is today. This leads me to wonder: Does the mortgage market need to be fixed and if so what still needs to be fixed?

We are all well aware of the extent to which GSEs and FHA currently provide liquidity to the U.S. mortgage market. I suspect consensus on this development is that it is far from ideal. Private, not public, capital should be supporting the mortgage market at least more than it does today.

But how much more?

Think back to before the mortgage crisis: Public capital played a very significant role, and had historically done so in the U.S. mortgage market. 

The GSEs also brought something else to the market: standardization. 

Is this a role that the private sector is qualified or prepared to play going forward? 

Is the goal to achieve a level of private capital that is higher than before the crisis?  One highly oversimplified argument against this is that the private-label RMBS market was a a major contributor to the financial crisis.

Yes, regulators have put in place new rules to reign in many of the bad practices of the past, but a new privately built market structured would be untried.

What if rather than creating a whole new market structure, as some have proposed, what if we went back to the way it was before with a few important improvements? 

The first improvement would be to develop private-label RMBS standards. Just as the GSEs issue standardized MBS, there could be a standard template for private label RMBS.

For example, there would be standards for the types of loans in the security, the type and amount of due diligence performed on the loans, and for the contract terms. 

This is part of what was missing in the private-label RMBS market of old. Second, go back to the conforming loan limits of old which will reduce the market share of the GSEs. 

Moving forward loan limits can be used to adjust the share of public versus private capital in the mortgage market over time.

The debate about how to balance public and private capital in the mortgage market is not a new one. But what we had before worked quite well and was mostly based on public capital.  

If it sounds like I’m asking more questions than I have answers for, it’s because there are no easy answers. 

Nonetheless, we may start by asking some easy questions and putting them in the context of what the mortgage market of the past really looked like to begin with.


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