Treasury Begins Push to Revive U.S. Mortgage-Bond Market
26 June 2014
By Clea Benson and Jody Shenn

The Treasury Department will launch an initiative to revive the market for mortgage securities without government backing, a Treasury official said.

Treasury Secretary Jacob J. Lew will direct senior staff to bring together institutional investors and issuers of mortgage bonds to develop guidelines to reassure both sides that they won’t be saddled with unfair losses, said the official, who spoke on condition of anonymity to discuss an initiative that hasn’t been announced.

Lew is set to discuss the new effort in a speech today. Treasury will also seek public feedback on how the market should work, the official said.

The market for bonds without U.S. backing, known as non-agency securities, has remained mostly frozen since the 2008 credit crisis as both lenders and investors struggle to regain trust after hundreds of billions of dollars in losses. Though the government is limited in what it can do to force private parties to agree, the effort could invigorate ongoing work by the industry to set new standards for transparency and responsibility.

“We think it’s absolutely fundamental that regulators and the administration are involved in all aspects of trying to revive this market,” Richard Johns, the executive director of the Structured Finance Industry Group, said today in a telephone interview.

Government Dominant

The government has dominated the issuance of mortgage securities since the crisis, with U.S. agencies and government-backed firms such as Fannie Mae now guaranteeing about 76 percent of new home loans, according to data firm Black Knight Financial Services.

After showing signs last year of heading toward a fuller revival, the market for non-agency securities stalled again as 2013 wore on, stunted by banks paying more for loans to hold on their balance sheets and bond investors paying less for the safest portions of deals.

Banks, which say they’ve been pushed to bear billions of dollars in costs for underwriting flaws unrelated to the causes of defaults, are seeking to better protect themselves before selling more securities. At the same time, bond investors including Pacific Investment Management Co. and BlackRock Inc. (BLK) say it’s been too hard to make issuers pay what they should and their own demand for new debt won’t fully revive until better processes are in place.

‘Lingering Mistrust’

“You have a lot of lingering mistrust and unwillingness to proceed on the assumption that everyone’s interests are aligned,” said Barry Zigas, director of housing policy at the Consumer Federation of America, a Washington-based group that advocates for consumers. “Now, people are very careful. They are arguing over where does one party’s obligation end and another’s begin.”

Non-agency issuance tied to new loans, which jumped to $13.4 billion last year from $3.5 billion in 2012, totals less than $2.5 billion in 2014, according to data compiled by Bloomberg.

Annual sales peaked at about $1.2 trillion during the housing bubble, fueled by homeowner and investor tolerance of riskier loans that later soured en masse, causing about $450 billion of losses between 2006 and 2012, according to Moody’s Analytics chief economist Mark Zandi.

Addressing Distrust

The industry itself is already trying to address the distrust between sellers and buyers of the debt in the wake of the crisis, though previous efforts have failed.

This year, the Structured Finance Industry Group started an initiative known as RMBS 3.0 which brings together market participants to find solutions to issues including contractual promises about the quality of loans and the process for forcing repurchases of misrepresented debt.

Industry participants say there are other things the government can do to help bring private capital back to the mortgage market. Competition from government-backed programs that charge less is among the biggest roadblocks.

Regulators also have been slow to issue new rules governing securitization mandated by the 2010 Dodd-Frank law. Six agencies are still working to finalize the qualified residential mortgage rule, which will require lenders to keep a stake in certain mortgages that they package into bonds.

The Securities and Exchange Commission has struggled to finalize its own series of new disclosure and other rules meant to strengthen confidence in the securitization market, known as Regulation AB. The agency originally released a proposal in 2010, re-proposed the regulation in 2011, and then delayed a vote on its adoption in February to seek more comments over consumer privacy concerns.
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