The venue was crowded, the party count was up and the mood at the Structured Finance Industry Group Vegas conference this week was definitely upbeat.
In the sessions and private meeting rooms, there was optimism about the economy, housing price appreciation, the quality of loan performance and the new administration’s stated goals of de-regulation and tax reform. The general consensus seemed to be that these trends will increase overall deal issuance incrementally in 2017 and gradually “nudge” private capital off the sidelines.
Despite the positive signs, however, panelists and the attendees weren’t ready to “place a bet” on when the private market will significantly expand, what form de-regulation will take or how quickly it will occur.
Regulatory sea change
The conference opened with a panel of public policy experts attempting to read the tea leaves (tea-tweets?) on how the Trump Administration will transform the regulatory environment for housing finance. Joshua Wilsusen, executive director at Morgan Stanley, told the audience to expect a “sea change” in the way the new administration will approach the regulations.
Ed Hill, senior vice president of public policy executive at Bank of America, added that even if the regulations aren’t immediately rolled back, their enforcement will change. “Where we are going to see some immediate impact is on the supervisory and enforcement side,” he said.
Dodd-Frank, the Consumer Finance Protection Bureau and its director will be in the GOP’s cross hairs, the panelists said. But it is unlikely that Republican lawmakers will have the votes to totally repeal the law and/or scuttle the agency and its leader.
Will CRTs blunt reform?
Two well-attended sessions looked at the success of the government-sponsored enterprises’ various credit risk transfer (CRT) programs. In 2016, Fannie Mae and Freddie Mac brought more than $13 billion in CRT transactions to the market, and some panelists expect issuance in these programs to eventually grow up to $30 billion to $40 billion annually. To date, CRT transactions have shared a portion of the risk on $1.4 trillion of the $5 trillion in outstanding GSE loans.
Panelists noted that the demand for the deals is growing, and more than 200 unique investors, including insurance companies and foreign investors are now participating in them.
As taxpayer exposure to losses continues to be reduced and private capital plays a bigger role, some observers believe these programs may help blunt the demand for GSE reform.
An audience poll showed that 94% believed there was less than a 25% chance of GSE reform before the mid-term elections, with 58% of the group saying there was no chance at all. While large-scale overhauls are unlikely soon, panelists asserted that the GSEs have actually been gradually reforming on their own since the crisis.
Better manufacturing & HPA
The pristine performance of the loans in CRT deals and recent private label RMBS was covered in several sessions.
Grant Bailey, managing director at Fitch Ratings, compared the performance of two sets of comparable loans, one from 2001 and the other from last year. After controlling for all of the key variables—loan type, documentation, purpose, LTV, FICO, DTI and HPA—the more recent vintage still outperformed by 30% to 50%. He attributed this to improved manufacturing, data integrity and reduced operational risk.
Laurel Davis, vice president with Fannie Mae, said that her agency is using big data tools and large sample sizes to improve quality and gain insight. Fannie Mae, she said, is now looking at 20,000 new appraisals every day.
Several economists, including Chris Flanagan, managing director at Bank of America Merrill Lynch, said tight supply in many markets and foreign buyers are driving up housing price appreciation. For Chinese buyers, Flanagan noted, a 5% HPA translates to a 14% return when you take into account the currency trade.
Sizing the market
Bailey said that when you add up all of the subcategories—private label, CRT, SFR and NPL/RPL—new issuance is running at about $60 billion annually.
Non-prime deals, which accounted for only about $1 billion in issuance last year, are showing early momentum, he said, pointing to 10 non-prime and expanded prime deals that have recently come to market. By next year, he said this subcategory could be as large as the jumbo prime category.
Speaking on another panel, Ryan Stark, managing director at Deutsche Bank, said he expected SFR issuance to be in the $4 billion range this year, roughly the same as 2016.
On Sunday, my colleague Jeff Berg, vice president at Clayton Holdings, participated in a panel on the role and duties of a Deal Agent. The discussion focused on the difference between the Treasury and SFIG’s separate proposals for the role and the issues that still need to be resolved.
While there was broad agreement that a Deal Agent would be directionally positive, there were differing point of views on the scope of the role and its economic impact on credit enhancement.
The pristine collateral going into prime deals continues to delay the development of the Deal Agent role, the panelists noted. To date, none of the new non-prime deals have included a Deal Agent.