Mortgage Bond Group Building Standards Sought by TreasuryJody Shenn
The U.S. mortgage-bond industry is taking steps toward creating standards meant to help kick-start sales as the government seeks to wean the housing market from its support.
The Structured Finance Industry Group, which represents firms from money managers to lenders including Bank of America Corp. to JPMorgan Chase & Co., released the first in a series of papers today mapping out its effort to create recommended contract language for new securities to address the mistrust that’s plagued the market since the 2008 financial crisis. About 200 individuals from 50 companies are working on the project, called RMBS 3.0.
Rebuilding confidence in the private mortgage-bond market will be needed for the government to shake off its dominant role in the $9.4 trillion home-finance system, said Eric Kaplan, who is helping lead the SFIG effort. Treasury Secretary Jacob L. Lew said in a June speech that his department was also starting an initiative to bolster the market for mortgage bonds without taxpayer backing, known as non-agency securities.
“Whether it’s slowly or quickly, that day will come, and if we haven’t solved the issues, we may not have the investors to provide that capital,” Kaplan, an executive at Shellpoint Partners LP, the lender backed by mortgage-bond pioneer Lewis Ranieri, said yesterday on a conference call with reporters.
The SFIG has about 250 members including banks, investors such as BlueMountain Capital Management LLC and Prudential Financial Inc., and issuers such as Redwood Trust Inc., as well as rating firms, trustees, lawyers and accountants.
In the paper released today, the group is seeking to address mortgage-bond terms ranging from representations that loans aren’t fraudulent to disclosures of underwriting guidelines and criteria for triggering reviews of loan files for breaches. In some cases, they recommend specific language, while in others they offer a few options for those terms.
The RMBS 3.0 initiative, which won’t attempt to create “one-size-fits-all” best practices, also calls for issuers to do a better job of explaining when and how the contracts are diverging from the standards, SFIG Executive Director Richard Johns said on the conference call. The recommendations are meant to evolve amid input from market participants not part of the group and regulators, he said.
Lew said in the June speech that he’s directing senior Treasury staff to bring together institutional investors and issuers to develop guidelines to reassure both sides that they won’t be saddled with unfair losses. The department also is seeking public feedback on a series of related questions, with comments due by Aug. 8.
A previous industry effort at setting mortgage-bond standards failed. The Project Restart initiative, undertaken by the American Securitization Forum that lost many of its members to the upstart SFIG last year over a governance dispute, unveiled model contract language in 2009, before fights between investors and banks escalated over boom-era loans.
The non-agency market, which financed 36 percent of new mortgages in 2006, accounted for about 1 percent last year, while government-backed programs represented 92 percent, according to a report last month by Goldman Sachs Group Inc.
After showing signs of a greater revival, sales of non-agency notes stalled as 2013 wore on, stunted by banks paying more for loans held on their balance sheets and bond investors paying less for the safest portions of deals. Issuance is also being hampered by lenders being offered higher prices when selling most types through government-backed Fannie Mae and Freddie Mac, whose future remains undecided, Johns said.
Non-agency issuance tied to new loans, which jumped to $13.4 billion last year from $3.5 billion in 2012, totals about $3.3 billion this year, according to data compiled by Bloomberg. Redwood, the top issuer in 2013 with 12 deals, has completed only two in 2014. Annual sales peaked at about $1.2 trillion during the housing bubble.
Morgan Stanley is now marketing its first offering since the crisis, the data show. The deal is backed by $256.5 million of prime loans, according to a person with knowledge of the offering, who asked not to be named without authorization to speak publicly.
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. say it’s been too hard to make issuers pay what they should.
While the market may not get as big as it was again, it “needs a little bit of a kick-start, and to do that you need some degree of standardization,” SFIG’s Johns said. An intervention by regulators to create standards would constrain the market, he said.
(An earlier version of this story corrected the name of the Structured Finance Industry Group.)