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Fitch: Regulators Have Room to Spur Private U.S. Mortgage Market
March 7, 2013 / 5:37 PM / 5 years ago

Fitch: Regulators Have Room to Spur Private U.S. Mortgage Market

(The following statement was released by the rating agency) CHICAGO, March 07 (Fitch) The use of new and existing approaches to draw more private capital into the U.S. mortgage market is at the heart of regulators' and politicians' agendas in 2013. Fitch sees the potential for some of these tools to be effective in gradually reducing the dominant role of government-sponsored enterprises (GSEs) in housing finance. To date, efforts by the Federal Housing Finance Administration (FHFA) and other federal agencies to provide incentives for the creation of a vibrant private mortgage securitization market have been largely unsuccessful. Approximately $6 billion in private-label mortgage securities were issued in 2012, and single-family housing finance continues to rely almost exclusively on government support, in the form of GSEs, Ginnie Mae, and Federal Housing Administration/Veterans Affairs guarantees. In our view, two potential reforms offer the most promise in drawing private investors back into the market. First, we believe further increases in guarantee fees (g-fees) charged by Fannie Mae and Freddie Mac will prove to be an effective mechanism. The FHFA has identified this as a priority in its latest reform scorecard, and g-fees have already doubled from precrisis levels to an average of approximately 50 bps for new single-family mortgages. FHFA acting Director Edward DeMarco noted in a speech on March 4 that g-fees would likely rise again in 2013, with the focus being on the creation of credit risk pricing that more closely resembles private market pricing norms. The effect of higher g-fees is likely to be gradual and it is challenging to forecast the level at which private execution will be more economic. The uncertainty regarding Basel III rules for mortgage assets and risk-retention requirements continues to push up the break-even point for many private market participants. Banks continue to be the largest holders of mortgage securities, and it remains unclear whether private investors can fill the gap, as banks reduce holdings. The combination of tougher risk-retention rules and new Basel III risk weights could make it increasingly punitive for banks to replace their agency security holdings with private-label securities. Liquidity in the market may also be limited, as banks, subject to the Volcker Rule, pull back on inventory levels. This could discourage private investors from increasing exposure to structured securities due to fears about back-end liquidity. One area of potential reform not mentioned specifically by DeMarco is further reduction of conforming loan limits, which would significantly increase demand for private capital, since mortgages above the reduced limit would not be eligible for GSE support. However, it is not clear how much impact this would have on the nascent recovery in the housing market. In addition, the FHFA has identified greater use of risk-sharing structures -- including credit-linked notes and new senior/subordinated structures -- that could potentially attract more private investors. We view this as a positive step, but the FHFA's initial target of $30 billion in risk-sharing for this year is very small relative to the outstanding balance of GSE-supported mortgages and recent issuance volumes. The proposed creation of a more robust secondary market infrastructure, in the form of a new entity that would be independent of the GSEs, represents an important step by the FHFA. The establishment of a more efficient back office system would improve standardization, data collection, and securities-issuing capabilities that private investors would require if a sustained revival of the secondary market is to occur. However, this will likely be a time consuming process that will not result in a near-term fundamental reform of the housing market in the U.S. For a review of recent developments in housing finance, including a presentation of various GSE reform alternatives, see "U.S. Housing Finance GSEs: Where to from Here," dated Feb. 28, 2013, at Contact: Ilya Ivashkov, CFA Director Financial Institutions +1 212 908-0769 Bill Warlick Senior Director Fitch Wire +1 312 368-3141 Fitch, Inc. 70 W. Madison Chicago, IL 60602 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research U.S. Housing Finance GSEs: Where to from Here here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

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