Lockhart Spells Out New MBS
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17 October 2011
Securitization Intelligence
Graham Bippart
Splitting the government-sponsored enterprises into old and new companies, with the "old cos" holding legacy mortgage loans backed by a government guarantee and the "new cos" originating loans without government backing, is the first step to giving the mortgage-backed securities market a fresh start, said James Lockhart, vice chairman at WL Ross & Co., in Monday's keynote address at ABS East.
"I think you have to split the GSEs," said Lockhart, who formerly served as director at the Federal Housing Finance Agency. "They are supported by the [Department of Treasury preferred [stock commitment], and you can't disentangle that, in my mind."
When pressed by an attendee, Lockhart said the portfolio split is the most urgent matter to tackle with regard to Freddie Mac and Fannie Mae. Another important issue he mentioned was for the 30-year, fixed-rate, fully prepayable mortgage to continue to be offered.
Newcos, Lockhart suggested, could be supported by risked-based government catastrophic insurance -- paid up front by the entity -- which would become more expensive over time, encouraging private sector growth. "Certainly they'd have very small portfolios," he added. Like the major banks, they should have living wills, Lockhart said. He also wants them to not be forced to originate lower-quality loans by the government.
"We need to start developing a plan to return the major portion of the [mortgage] market to the private sector," Lockhart said. GSEs take up about 95% of the single-family market-share, and almost 90% of the multifamily market, he said. "We really don't have a private-label market in this country, and the [remainder] is staying on bank balance sheets, for now."
According to Lockhart, Freddie and Fannie hold or guarantee about 56% of the 53 million outstanding mortgages, while only 9% of mortgages are held privately, a number that has diminished, primarily because of foreclosures. Both the private-side and the GSEs have the same percentage of mortgages over 90 days delinquent at 28%.
"[These are] problems that the private-label securities market really created," Lockhart said. Pooling and Servicing Agreements have tied servicers' hands to rework delinquent loans. Lockhart thinks that the Treasury should allow servicers to sell discounted pools of mortgages under the Home Affordable Modification Program. "We could get these mortgages reworked with the Treasury pushing it," he said. |
