August 15, 2014
Yesterday, I wrote about the Securities Industry and Financial Markets Association (SIFMA)’s FHFA comment letter. Today I write about SIFMA’s comment letter in response to Treasury’s request for input relating to the future of the private-label securities market. Like the FHFA comment letter, this one is written with the concerns of SIFMA’s members in mind, no others, but it identifies many of the structural problems that exist in the housing finance system today.
If I were to identify a theme of the comments, it would be that the federal government has not moved with sufficient speed to establish a well delineated infrastructure for the housing finance market. Some commentators identify benefits of a slow approach — time to get consensus, time to get rules right, time to for trial and error before committing for the long term. Few identify the costs of regulatory uncertainty — failure to get buy-in for capital-intensive ventures, atrophy of existing resources, limited investor interest.
Now, SIFMA’s members want a vibrant private-label MBS market to make money. But a vibrant private-label MBS market is also good for the overall health of the mortgage market as it spreads risk to private MBS investors and reduces the footprints of the gargantuan GSEs and the government’s own FHA. After all, most of us want the private sector taking a lot of the risk, not the taxpayer.
Notwithstanding the strengths of SIFMA’s comment letter to Treasury in critiquing the status quo, I will highlight a few passages from it that hit a false note. The first relates to the role that private-label securities (PLS) have played
in funding mortgage credit where loan size or other terms may differ from those available in the Agency markets, or where economics dictate that PLS execution is superior. The PLS market may also be more innovative and flexible than the Agency markets in adapting to economic conditions or consumer preferences, or to changing capital markets appetite. (3)
This innovation has obviously cut both ways in terms of introducing new products that can help expand access to credit as well as expand access to credit on abusive terms. The latter way seems to have predominated during the most recent boom in PLS MBS.
The second one relates to assignee liability. SIFMA states that
Investors are concerned with the prospect of assignee liability stemming from violations of the ability-to-repay rules contained in Title XIV of Dodd-Frank and embodied in the CFPB’s implementing regulations. SIFMA has raised concerns with assignee liability in many forms over the years based on the fact that mortgage investors are not at the closing table with the lender and borrower, and should not be held liable for defects of which they have no knowledge or ability to prevent. While efforts were made by policymakers to provide some level of certainty through the inclusion of safe-harbor provisions, no safe harbor is entirely safe, and it is important to note that none of these provisions have been tested in court. It will be in litigation where the market learns the exact boundaries of the protections provided by any safe harbor. This potential liability for investors is likely to reduce the availability of higher-priced QM loans and non-QM loans, all else equal, due to higher required yields to compensate for the increased risk. (5-6)
This focus on assignee liability seems to be a red herring, one that SIFMA has floated for years. The risk from assignee liability provisions is not limitless and it can be modeled. Moreover, the notion that investors should face no liability because they are not at the closing table is laughable — without them, there would be no closing table at all. They paid for it, even if they are not in the room when the closing takes place.
The last one relates to the threatened use of eminent domain by some local governments to take underwater mortgages and refinance them to reflect current property valuations:
Investors have significant concerns with, and continuing distrust of the policy environment because of a sense that rules have been and continue to be changed ex-post. The threat by certain municipalities to use eminent domain to seize performing mortgage loans has been a focus of MBS investors for the last two years and would introduce a significant new risk into investing in PLS. These municipalities propose to cherry-pick loans from PLS trusts and compensate holders at levels far below the actual value of the loans. SIFMA’s investor members view such activity as an illegal taking of trust assets, and successful implementation of these plans would severely damage investor confidence in investing in PLS. (6)
This is another red herring as far as I am concerned. The use of eminent domain is not an ex post legal maneuver. Rather, it is an inherent power of government that precedes the founding of this country. I understand that MBS investors don’t like it, but it is not some kind of newfangled violation of the rule of law as many investor advocates have claimed.
Notwithstanding its flaws, I recommend this letter as a trenchant critique of the housing system we have today.| Permalink