Or, why the private label mortgage securitisation market keeps failing to rise from the dead — especially as the US grapples with Fannie/Freddie reform.
Here’s the thinking, from Deutsche Bank’s Steven Abrahams:
Last week at lunch with a friend from the business, talking again about getting the private MBS market restarted, a light went on. We had rehashed the usual problems with originators, rating agencies, trustees, servicers and so on. They all had problems that needed to get fixed. Mea culpa, broker/dealers, too. But the CMBS market had still managed to stock a pipeline of new deals, and the ABS market, too. Those markets had the same bands of pirates and innocents as MBS. As we sat thinking about that little mystery, he said something that had the ring of truth: banks today may be the best holders of mortgage risk.
As I thought about it later, banks need much less capital to hold a mortgage on the balance sheet than investors need to buy that same loan in a securitization. If a prime borrower walked in the door to take out a loan for more than Fannie Mae or Freddie Mac’s current limit of $729,750, a bank would have to put 4% capital against it—maybe 5% at the most. Put that same loan and others like it in a private securitization, and investors as a group would have to put up nearly 11% capital. That speaks to the First Rule of Fixed Income: he who has the better leverage and funding always wins the asset.
No kidding.
Of course, one of the problems with — you know — the whole housing bust thing was that banks clearly didn’t hold enough capital against dodgy private label loans. But putting that (massive) issue to one side for a second, Abrahams does have a point.
There are lots of issues plaguing the market at the moment, but private securitisation isn’t going to emerge from the ashes of the crisis until it’s economical for it do so:
American’s love a fair fight, but the one between bank and investor leverage and funding isn’t even close. And that’s not including the capital cushion that investors might put aside for margin calls. Throw in the towel.
Related links:
Private-label MBS issuance likely to remain uneconomical in 2011 – Housing Wire
Is it verboten to talk about the securitization buyers’ strike? - Foreclosure blues
Rebooting the private MBS market – Mortgage Banking
CDO lemons, a government fruit bowl - FT Alphaville