They once exceeded one trillion dollars in annual issuance, but now U.S. private-label residential mortgage-backed securities (RMBS) have faded into the shadows. The housing market downturn was one of the leading contributors to the securitization market’s departure from housing finance, and housing’s continuing weakness is largely why a revival in private-label RMBS is still several years away.
In the meantime, the long-established GSEs, mainly Fannie Mae and Freddie Mac, now issue the majority of the RMBS in the debt markets: They finance a little over 50% of $10.5 trillion in outstanding mortgages and over 90% of the current mortgage loan originations. The GSEs influence in the housing market is very strong. However, the U.S. Treasury is considering various proposals to unwind Fannie and Freddie by privatizing housing finance, which, in our view, may provide hope for a revival in private-label RMBS. This is easier said than done, of course. The GSEs have a long and deeply entrenched history in the fabric of housing finance, having provided stability and liquidity for decades before the recent housing downturn. Even putting that history aside, any reformation process would likely take several years because the government isn’t likely to pull out of the housing finance business until it’s confident the housing market has strengthened enough to withstand an overhaul.
To see the full report “Why A Revival In The U.S. Private-Label RMBS Market Is Still Years Away” Click Here. Below is a summary of the report published on May 24.
- The housing downturn drove the securitization market away from housing finance, and continued weak housing is largely why the private-label RMBS market has been slow to recover.
- In addition to weak housing, other factors delaying the market’s recovery include proposed government sponsored entity (GSE)
- A revival in private-label RMBS is on a slow track. In the short run, a potential drop in conforming loan limits and passage of covered bond legislation could spur issuance. In the long term, however, any material recovery will be borne out of a strengthened housing market and implementation of housing finance reform.