Industry Calls for Less GSE Action, More Investor Protection

At a hearing Wednesday, four witnesses voiced concerns about the government's participation in the mortgage market as well as the lack of transparency between servicers and investors.

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The hearing before the U.S. House of Representatives Financial Services Subcomittee on Capital Markets and Government Sponsored Enterprises was titled, ""Facilitating Continued Investor Demand in the U.S. Mortgage Market Without a Government Guarantee.""

""The state of housing finance in the US, where government sponsored entities (GSEs) account for over 90 percent of all mortgage loans currently made, is problematic,"" said Ajay Rajadhyaksha, managing director at Barclays Capital.

Martin S. Hughes, president and CEO of Redwood Trust, Inc., agrees and believes it is time for the government to begin backing out of the market.

Citing Inside Mortgage Finance, Hughes said the top 10 jumbo mortgage lenders originated $25 billion in loans in the first quarter of this year.

""Clearly, the nongovernment guaranteed origination segment of the private market is functioning well,"" he stated.

Hughes conceded that the private securitization market is not performing well, and he believes part of the problem is that ""the government is crowding out the private market through loan programs that make 90 percent of borrowers eligible for a below‐market‐rate government guaranteed mortgage loan.""

As a first step, he suggests allowing the temporary increase in the conforming loan limit to expire as scheduled at the end of September.

Hughes noted that new standards for underwriting and servicing loans and more protection for investors are also needed to boost the secondary market.

However, Hughes stresses that reforms necessary for the prime mortgage market are not the same as those needed in the subprime market.

""A new regulation designed to accomplish one objective can easily do great harm to fulfillment of the other objective, if applied to both,"" Hughes said. ""We see that happening with much of the Dodd-Frank rulemaking.""

Echoing Hughes' call for investor protection and representing the Association of Mortgage Investors, Chris Katopis stated, ""[M]ortgage investors face enormous challenges in the capital markets due to opacity, an asymmetry of information, poor underwriting, conflicts-of -interests by key parties in the securitization process, as well as, the inability to enforce rights arising under contracts, securities and other laws.""

One of Katopis' suggestions is to require a ""cooling off period"" during which investors can analyze loans in asset-backed securities before committing to them.

""Typically, deals came to market so quickly that investors were forced to rely on rating agency pre-issuance circulars, termsheets or weighted average collateral data,"" said Joshua Rosner, managing director at Graham Fisher & Co. ""These tools have proven inadequate.""

Rosner suggests, ""data on the specific underlying collateral in each pool should be made available for a reasonable period (not less than 5 days) before a deal is sold and brought to market.""

Rosner and Katopis also stress the importance of transparency and a standardization of information and language among servicers.

""Asymmetry of information between buyer and seller remains the standard,"" Rosner stated. ""In fact, through elimination of the Regulation Fair Disclosure exemption for rating agencies, Dodd Frank has resulted in a reduction in the information available to investors.""