Outlook for Mortgage Market: Feels Like ‘Groundhog Day’
By Nick Timiraos and Al Yoon
LAS VEGAS—The American Securitization Forum returned here after a two-year hiatus for an annual meeting with little of the optimism for a quick turnaround in the market for mortgage-backed securities that had marked previous events.
Instead of predicting how many privately issued mortgage deals would emerge this year, some panelists suggested a better question was whether an organic market would return at any time in the near future.
“Stop pretending like it’ll resolve itself,” said Alan Boyce, an industry veteran who now runs Absalon, a joint venture supported by billionaire financier George Soros. “When it comes to the return of private capital, private capital is still exiting the U.S. mortgage market.”
Congress and the White House have made little progress to overhaul mortgage-finance giants Fannie Mae and Freddie Mac, with lawmakers generally arguing that the housing market remains too fragile to take any steps that would raise borrowing costs.
Discussing government plans for the firms has begun to feel like “Groundhog Day,” said Jay Diamond, managing director of Annaly Capital Management. One year from now, the housing-finance market “will probably look a lot like it is right now” despite more hearings, conferences, white papers, and calls for an overhaul.
The firms involved in creating and buying asset-backed securities spent much of the time lamenting an uncoordinated policy response from Washington, raising alarm that regulators were gambling with a brew of new rules that they said would have far-reaching and costly side effects.
The industry was badly fractured four years ago when investors lost confidence in securities backed by home mortgages and credit-card receivables amid huge losses. Since then, Congress passed the Dodd-Frank financial-overhaul law, which includes a wide range of regulations, many of which have yet to be finalized by a mix of agencies.
Regulators are trying to “concoct a pill for every symptom associated with the unhealthy practices” that prevailed during the go-go years of the past decade, said Ralph Daloisio, chairman of ASF. But he warned that the medicine would produce “interactions and side-effects” that would go far beyond the problems regulators had diagnosed.
“You don’t have to say, ‘I don’t know what’s going to happen,’” said Reginald Imamura, executive vice president of PNC Capital Markets. “You can actually see the interaction of some of these rules combined could cause liquidity to evaporate.”
But other industry officials also cut regulators some slack, arguing that lawmakers had simply placed unrealistic burdens on them to craft a bevy of intricate rules. “I do believe every regulator I work with is extremely well intentioned and is very much trying in these trying times to get things right,” said Tom Deutsch, executive director of the ASF.
For their part, regulators insisted that several important overhauls needed to be put in place. Adam Ashcraft, senior vice president at the Federal Reserve Bank of New York, reminded attendees that the market for securitizing subprime mortgages had blown up twice in less than a decade—not only in 2007, but also in the late 1990s. “We didn’t seem to learn there,” he said.
Industry and government officials have made reviving the private mortgage market for residential mortgage bonds a top priority. For the past four years, government-backed entities have accounted for around 90% of mortgage originations. Banks have opted to keep loans that aren’t eligible for sale to government entities on their balance sheets, while investors have been skittish about buying non-government-guaranteed bonds due to the prospect of future home-price declines.
Only Redwood Trust Inc., a real-estate investment trust based in Mill Valley, Calif., has been able to package loans into private securities, though it has said that bank competition for the loan collateral has limited its efforts. It sold its fourth mortgage bond offering since the financial crisis last week, but the issue has generated little hope for more, analysts said.
The market for privately issued mortgage bonds has shrunk to $1.1 trillion outstanding from $2.4 trillion in 2007, according to Nomura Holdings. Total residential loan securitization volume was $37 billion last year, a fraction of the $711 billion during the market peak in 2006, according to Dealogic.
Mr. Deutsch made no bones about holding the event in Las Vegas at a gleaming luxury hotel, casino and retail complex that opened two years ago and itself had become a symbol of the frenzied real-estate bubble of the past decade.
Venues in Orlando last year and the Washington, D.C., area in 2010 had proven too small to accommodate all of the trade show’s attendees. Las Vegas offered “the only facilities … that are able to accommodate this size of event,” Mr. Deutsch said, noting that this year’s 5,000 attendees exceeded last year’s crowd of 4,500.
Mr. Daloisio said that hosting the event in Las Vegas, a “location of natural and manmade surrealism,” was proving to be “all too fitting for the surrealism we are experiencing from the policy environment.”