The securitization of mortgage loans without government backing has collapsed. While the securitization of loans with government backing has remained strong or strengthened, the collapse of private-label securitization (PLS) may have wide-reaching implications for the mortgage market. The disappearance of this market has affected the availability and cost of mortgages for one group of borrowers—those with less wealth and less than perfect credit who do not quality for government-backed loans. But if securitization remains a purely government-backed activity this impact may spread. Ultimately, it could change the availability and cost of mortgages for all borrowers, even those with high net worth and pristine credit.
A robust mortgage-backed securities (MBS) market ensures that there is always ample money on hand for lenders to make new mortgage loans. Today, however, only the government-sponsored enterprises (GSEs) and Ginnie Mae (which securitizes government-guaranteed mortgages from the Federal Housing Administration (FHA), Department of Veterans Affairs and US Department of Agriculture) are securitizing loans in significant numbers. The GSEs primarily attract the highest quality, least-risky loans within their allowable loan size limits, while Ginnie Mae largely serves minority and first-time homebuyers. This means mortgage money is flowing reasonably well to some potential borrowers—those with high-quality, low-risk loans that meet the GSE size limits and minority and first-time homebuyers who qualify for FHA lending. And because banks are lending to their best customers, mortgage money flows well to borrowers with pristine credit seeking jumbo mortgages.
A big part of what’s missing from the market is the private-label securities, based on loans without government backing. The $718 billion 2007 PLS market plunged to $59 billion in 2008; It has not been above $64 billion since then. The loss of the PLS market could render mortgage securitization an exclusively government-sponsored activity and lock borrowers who need larger loans or have less than pristine credit out of lending.
Who’s locked out of lending now?
- Borrowers who don’t meet government lending guidelines and have imperfect credit. With a very small PLS market, borrowers who don’t fit the GSEs or government agencies’ underwriting guidelines or have multiple sources of income that can’t be aggregated under those guidelines have difficulty obtaining a mortgage. Another option for these borrowers is to obtain a mortgage from a bank that wants to make and keep profitable mortgages in their own portfolio. But banks are generally not interested in loans made to borrowers with less than pristine credit.
Who could be impacted in the future?
If banks retreat further from holding mortgages before the PLS market restarts, other borrowers will begin to lose access to affordable mortgages.
- Borrowers with high net worth and perfect credit: The collapse of PLS has not affected the availability or cost of credit for loans made to these borrowers yet, because banks still compete to put those loans on their balance sheets. As the profitability of holding those loans declines (or alternative lending becomes more profitable), however, in the absence of a private-label securities market, access for those borrowers will become more difficult and expensive.
- Borrowers in expensive areas who need jumbo loans: GSE loans cannot currently exceed $625,500 in the highest cost areas and $417,000 in other areas. FHA loan limits vary by county; they are the same as for the GSEs in the highest cost counties, and may be less in other counties. Today, borrowers in pricier areas can still get loans because banks are willing to hold them in portfolio. If that were to change, however, if other types of lending became more lucrative for example, these loans will be more difficult to get and more expensive. Mortgages would then become costlier or unavailable for these borrowers, even for a move-up or refinance loan.
The PLS market has supported mortgage lending in the United States for 38 years. The truth is, we don’t quite know what lending will look like if PLS disappears completely. It could reduce competition enough that easy access to affordable mortgages becomes difficult for everyone.
We hope this is sufficient impetus for PLS participants to take the steps necessary, (detailed in the linked brief) to attract more investors, a precondition to re-opening this market.
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