A U.S. private-label residential mortgage-backed securities market’s revival remains elusive since the overall economy, employment, and housing market are still struggling even though we aren’t officially in a recession. Diminished political will to reform the mortgage market during the looming presidential election season further complicates matters.
A recovery in private-label RMBS—transactions not issued by government-sponsored entities Freddie Mac or Fannie Mae—is probably at least several years away.
One recent positive development, however, comes from the Oct. 1, 2011, reduction in conforming loan limits, which set a maximum amount for mortgages under Freddie Mac and Fannie Mae, to $625,500 from $729,750 in high-cost areas. We believe this is a first step in reducing the role of government in housing finance and spurring private capital’s return to the market. As a result, we could perhaps see a few private-label prime issuances in 2012. The conforming loan limit for mortgages insured by the Federal Housing Administration (FHA) was also lowered on Oct. 1, 2011; however, U.S. lawmakers recently restored the higher pre-October conforming loan limit for FHA-backed mortgages through 2013.
Before the market faded away in the second half of 2007, private-label RMBS issuance had exceeded a trillion dollars annually. Its near total absence from mortgage finance since then, of course, has been conspicuous. However, the more pressing concern is what it’ll take for this market to return and start playing a role in housing finance.
The evolution for such a revival would likely begin with continued economic growth to chip away at the stubbornly high U.S. unemployment rate, still hovering around 9%. Once the employment picture brightens, mortgage delinquencies and foreclosures will fall and further stabilize. That should help normalize the shadow inventory of properties that are seriously delinquent or in foreclosure and not yet on the market because of depressed prices, as well as the number of underwater mortgages, for which the amount owed exceeds the value of the property.
At the end of the chain, home prices would need to be based on a balancebetween demand and supply. The imbalances we’ve been seeing are what’s kept downward pressure on prices—and will likely continue to do so during the seasonally weak winter months.