Hope for the Securitization Market

The Structured Finance Industry Group has issued a white paper, Regulatory Reform: Securitization Industry Proposals to Support Growth in the Real Economy. While the paper is a useful summary of the industry’s needs, it would benefit from looking at the issue more broadly. The paper states that

One of the core policy responses to the financial crisis was the adoption of a wide variety of new regulations applicable to the securitization industry, largely in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). While many post-crisis analysts believe that the crisis laid bare the need for meaningful regulatory reform, SFIG members believe that any such regulation must: ƒ

  • Reduce risk in a manner such that benefits outweigh costs, including operational costs and inefficiencies; ƒ
  • Be coherent and consistent across the various sectors and across similar risk profiles; ƒ
  • Be operationally feasible from both a transactional and a loan origination basis so as not to compromise provision of credit to the real economy; ƒ
  • Be valued by key market participants; and ƒ
  • Be implemented in a targeted way (i.e. without unintended consequences).

In this paper, we will distinguish between the types of regulation we believe to be necessary and productive versus those that are, at the very least, not helpful and, in some cases, harmful. To support this approach, we believe it is helpful to evaluate financial market regulations, specifically those related to securitization, under three distinct categories, those that are:

1. Transactional in nature; i.e., directly impact the securitization market via a focus on underlying deal structures;

2. Banking rules that include securitization reform within their mandate; and

3. Banking rules that simply do not contemplate securitization and, therefore, may result in unintended consequences. (3)

The paper concludes,

The securitization industry serves as a mechanism for allowing institutional investors to deliver funding to the real economy, both to individual consumers of credit and to businesses of all sizes. This segment of credit reduces the real economy’s reliance on the banking system to deliver such funding, thereby reducing systemic risk.

It is important that both issuers of securitization bonds and investors in those bonds align at an appropriate balance in their goals to allow those issuers to maintain a business model that is not unduly penalized for using securitization as a funding tool, while at the same time, ensuring investors have confidence in the market via “skin in the game” and sufficiency of disclosure. (19)

I think the paper is totally right that we should design a regulatory environment that allows for responsible securitization. The paper is, however, silent on the interest of consumers, whose loans make up the collateral of many of the mortgage-backed and asset-backed securities that are at issue in the bond market. The system can’t be designed just to work for issuers and investors, consumers must have a voice too.

The Trump Effect on Mortgage Rates

photo by Sergiu Bacioiu

The Christian Science Monitor quoted me in What Does President Trump Really Mean for Mortgage Rates? It opens,

In the week following the election, mortgage rates soared nearly half a percentage point. Average weekly 30-year fixed home loan rates are back above 4% for the first time since July 2015.

Here’s a three-minute read on the Trump Effect — past, present and future — on mortgage rates.

What happened to mortgage rates right after the election

Investors sold bonds on President-elect Donald Trump’s stated goals to lower taxes, boost deregulation and make massive infrastructure investments. A growing economy fueled by government spending could trigger higher inflation, which is a concern for the bond market.

As bond prices fell from the sell-off, yields rose. Higher bond yields equal higher mortgage rates. is happening with mortgage rates now

What is happening with mortgage rates now

Rates are already taking a breath. After a quick run-up following the election,  30-year mortgage rates are generally holding steady, near 4%.

What will happen to mortgage rates in 2017

The Federal Reserve this week reaffirmed its intention to begin raising short-term interest rates, most likely beginning in December. Following that hike, if it happens, the U.S. central bank’s policy-setting Federal Open Market Committee is looking to manage a slow climb in rates.

“The FOMC continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain maximum employment and price stability,” Fed Chair Janet Yellen told Congress on Nov. 17. Those moves will influence longer-term rates such as on mortgages to rise as well.

And there’s another potential trigger for mortgage rates to move higher.

While Trump hasn’t taken a stance yet, Republican party leaders have been vocal about getting the government out of the mortgage business. That could mean redefining the role of the Federal Housing Administration and moving Fannie Mae and Freddie Mac to the private sector.

David Reiss, a professor at Brooklyn Law School, concentrates on real estate finance and community development. He sees the Republican agenda to “reduce the government’s footprint in the mortgage market” as a possible catalyst to higher mortgage rates in the future.

“You put the government’s stamp of approval on companies like Fannie and Freddie, and it lowers interest rates because they can borrow at a lower rate — but then the taxpayers are on the hook if things go south, and that was the case in 2008,” Reiss tells NerdWallet. “If you reduce the federal government’s role in the housing markets, you’re going to reduce the likelihood of future bailouts by taxpayers. That’s the trade-off.”