It may be time for lenders to do something that's not economically beneficial in order to open up the private-label residential mortgage-backed securities market, according to one banking executive.
But other bankers said the math doesn't add up and originators are hesitant to do anything until the federal government decides what to do with government-sponsored enterprises Fannie Mae
and Freddie Mac
"We can't just wait and see. We may need to do something that's uneconomic," said Anthony "Tuck" Reed, senior vice president of capital markets at Wells Fargo Home Mortgage
. Tuck was speaking in Orlando Tuesday during the American Securitization Forum
conference. "Necessity is mother of invention."
But Ryan Stark, director of Deutsche Bank Securities
, said it is tough for originators to make money on nonagency RMBS in the current market.
"There's strong demand for paper out there, but the economics just don't work for the originators," Stark said.
Meanwhile, investors need to take a disciplined view of the relative risks of investing in MBS and get compensated for assuming that risk, according to Kent Smith, senior vice president at PIMCO
But "until the government defines what the government market is, there isn’t a market for nongovernment" MBS, Smith said.
Reed said there has been a complete reversal of the commonly held beliefs of the market in regard to reform of the government-sponsored enterprises.
A year ago, most market participants thought any type of privatization of the mortgage market would be prohibitive and now that's "completely changed to 'Why cant we privatize everything?'," he said.
Reed said the American housing finance system is built on the government guarantee provided by the GSEs, so any reform must include a mechanism for someone to provide the capital needed to support the system. Although there could be several structural obstacles to privatization that would become extremely important for any reform.
Armando Falcon, chairman and chief executive of Falcon Capital Advisors
, said any policy reform should be geared toward developing a sustainable mortgage market.
And that has been the focus of discussion in Washington, he said, adding that the Obama administration may deliver its proposals for GSE reform by the end of the week. The Treasury Department
was initially expected to announce its proposal by the end of January. Falcon expects a number of options from the administration, although he'd like to see one specific option.
He said some of the questions any reform needs to answer include: Do we want to subsidize the mortgage market and how much? Whom do we want to subsidize? What will be the form of the subsidy, and how do we want to administer or deliver the subsidy?
"The current implicit guarantee has proven to be a recipe for disaster," Falcon said. "But is it still needed?"
Any reform also needs a credible transition period that provides minimal disruption to the market while minimizing losses from the legacy system and minimizing costs for the new entity, Falcon said. A "sunset process is necessary to ensure (the) transition system doesn't become (the) permanent system," he said.
He urged lawmakers to do something this year, because the reform of the GSEs cannot linger into next summer with the presidential election coming in November 2012, as politicians won't to breach the subject ahead of the vote.
"Worse case scenario is nothing happens," Falcon said.
Write to Jason Philyaw