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Treasury-sponsored group releases plan to revive private mortgage securities

A U.S. Treasury-initiated task force released a plan this week to revive the largely defunct private-label mortgage-backed securities (MBS) market.

The working group was tasked by Treasury 18 months ago to hash over issues that have kept MBS down, and it has produced a framework that could be used in structuring future offerings of securities.

Key to the proposal is the idea of using “a deal agent” to oversee the trust that issues the securities. The deal agent would be a semi-independent entity with the power to manage the trust, do investigations of faulty loans and make administrative changes related to the bonds.

The intent is to make the securities more user-friendly and transparent for investors. The deal agent would also serve on the behalf of all bondholders, eliminating apparent conflicts of interest in decisions and the concept of a controlling group of investors.  

A spokesman for the working group emphasized that this is a starting point. The industry, for example, would still have to determine what entities could serve as ‘deal agents’ and what compensation levels would be for those agents. Ultimately, it would be up to the bond issuers to structure deals with these recommendations.  

“RMBS [residential mortgage-backed securities] were once a large source of private funding for the U.S. mortgage system, but new origination have remained effectively frozen since the 2008 financial crisis,” said Alessandro Pagani, head of securitized assets at Loomis, Sayles & Co. and a co-leader of the working group. "Most investors have steered clear of this market due to its perceived lack of investor protections and transparency." 

In a speech on Monday at the asset-backed securities conference in Las Vegas, Treasury Deputy Assistant Secretary Monique Rollins said the working group was not entirely in agreement on the framework, and the proposal is not endorsed by Treasury. She said the document was “an encouraging sign,” however, that industry is formulating plans to revive the market. The working group also touched on issues of servicing and the problem of enforcing the contractual obligations of each party in the transaction. 

An MBS revival faces multiple challenges 

A revival of MBS would have far-reaching implications on the mortgage market. At the height of the housing bubble, more than half of all U.S. home mortgages were packaged into private-label securities. 

Most mortgages today are either funded by the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, which purchase the loans and securitize them, or the mortgages are backed through government-loan programs.

The private market is largely confined to jumbo loans to borrowers with excellent credit. These loans are typically never securitized and are kept on the bank’s balance sheet.

Several investigations into the causes of the housing collapse have pointed out that the old MBS market was rife with conflicts of interest. MBS issues were at the forefront of fueling an explosion of subprime and predatory lending that eventually helped to tank the economy.

Most industry analysts say, however, that the current lending environment is overly tight and a private-label market is needed to serve worthy borrowers that might not otherwise qualify for the GSE or government loan programs. The goal of housing reform is, in large part, to attract private capital back into the mortgage market and to reduce the government’s enormous footprint on the housing sector.  

Laurie Goodman, director of the Housing Finance Policy Center for the Urban Institute, said a deal agent would address conflicts of interest in the governance structure, but the industry still needs to standardize the stacks of documents generated in these deals and eliminate conflicts of interest in servicing.

She said  the revival of the private-label securities “still has a long way to go,” but investors will have great incentive to revive the market when the economics makes sense.  

“I would expect to see [a deal agent] adopted, at least in some deals,” Goodman told Scotsman Guide News. “Certainly, in less-than-prime deals, you would think that investors would absolutely require it. In prime deals, there is obviously a cost benefit.”  


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