The Fed bought $1.25 trillion of mortgage backed securities in the last 15 months and Fannie and Freddie plan to buy $200 billion more of delinquent loans to free up investor money. But without private investors stepping up, we could see mortgage interest rates back up at 6 percent or higher within six months to a year.
At least one private investor group signaled it is ready to test the waters, while others are using the occasion to press for reforms.
Redwood Trust plans to offer a $200 million sale of mortgage securities as early as next week. That would mark the first sale in more than two years of private-label securities comprised of new home mortgages underwritten without any government backing.
In the meantime, some investors pressing for what they say are needed reforms. Yesterday, The Association of Mortgage Investors, a lobbying group for private investors, issued a white paper with 10 "guiding principles" for Congress and federal regulators. "Now that poor credit underwriting, moral hazards, inadequate disclosures, asset servicer conflicts of interest, rating agency failures, and logistical obstacles to working out bad collateral assets have scared investors away from the securitization markets," the association wrote, "it is important for the government to consider the policy recommendations of investors, whose participation and capital are needed for there to be an asset-backed securities market at all."
The reforms they seek are primarily to open up the securitization process and allow them to take a closer look at the underlying assets. Here are some of the key reforms they seek:
- Provide loan-level information that investors, ratings agencies and regulators can use to evaluate collateral and its expected economic performance, both at pool underwriting and continuously over the life of a securitization. The association believes by opening this information they will be able to make better purchase and sale decisions related to asset-backed securities.
- Require a "cooling off" period when asset-backed securities are offered so that investors have sufficient time to review and analyze loan-level information before making investment decisions. They want a two-week period from the time the asset is offered to give them time to analyze collateral at the loan-level. New issues of equity and debt securities are required to have a "cooling off" period, and the association wants similar rules for mortgage securities.
- Make deal documents for all asset-backed securities and structured finance securities publicly available to market participants and regulators.
- Directly address conflicts of interest of servicers that have economic interests adverse to those of investors.
I did try to contact the association, which is represented by Micah Green, an attorney at the law firm of Patton Boggs, but did receive a call back. The law firm lobbies Congress for various associations and corporations.
Lita Epstein has written more than 25 books including Trading for Dummies and Reading Financial Reports for Dummies.