Redwood: Government support of mortgage market 'not sustainable'
Redwood Trust (RWT), the only issuer of a private-label, mortgage-backed security since the financial meltdown in 2008, said the housing industry is benefiting from the government's continued support of the market — for now. Through Fannie Mae, Freddie Mac and Ginnie Mae, the government finances more than 95% of the mortgages currently being written in the U.S. When Congress comes back from recess in September, it will have a chance to begin unwinding its lifeline. The conforming loan limits, or the maximum amount of a loan that can be guaranteed by Fannie, Freddie or insured by the Federal Housing Administration, expires Oct. 1. Already the industry is pushing its support of a bill in the House and another in the Senate to extend these limits. Other reforms remain on the distant horizon, including the reform of Fannie and Freddie. In its second-quarter earnings report, Redwood said as long as these conditions persist, opportunities for private investors to fund more loans remains "subdued." Even more, Redwood said, the government support cannot continue much longer. "Many real estate agents, homebuilders and banks appear to benefit from such a status quo. Our strategic outlook, however, is that over time the current outsized role of government support for the $9.6 trillion residential mortgage market is simply not sustainable, especially in light of the painfully heated debates throughout 2011 over raising the $14.3 trillion federal debt ceiling," Redwood said. Since the financial collapse in 2008, Redwood closed on the only RMBS deal in 2010, issued another in March 2011 and early this year said they planned to issue two more by the end of the year. "We believe it is probable that the loan-limit reduction occurs as scheduled," Redwood said. "However, we expect pro-status quo forces to continue advocating against this reduction up to the point it is scheduled to occur, perpetuating an element of uncertainty to the existing timeline for reform." Indeed, both the National Association of Realtors and the Mortgage Bankers Association, two of the most influential trade groups in the industry, recently threw their weight behind extending the loan limits. They claim the still struggling market continues to rely on such support. Redwood admitted "a steady stream of bad news" from recent economic trends, the looming debt ceiling fight, the crisis in Europe and the end of the Federal Reserve's second quantitative easing program all turned investors away from riskier bets in MBS. Still, Redwood said eventually the private market will have to make a come back again. "As the government eventually and gradually withdraws support for mortgage financing, we believe private capital (outside of banks) will be called upon to step in and fill the void," Redwood said. Write to Jon Prior. Follow him on Twitter @JonAPrior.