Prior to the COVID-19 outbreak, the private-label securitization market (RMBS 2.0) was finally making a comeback. Not at all the same market as pre-2008, the many changes to securitization, regulatory oversight, and underwriting standards created a markedly different pool profile. With ten years of hard-won investor confidence, the market was starting to look healthy again. Now with the economy shut down, the private-label securities (PLS) market has come to a halt. As such, it is important to understand the role of the PLS market as a critical component in a healthy, robust housing market.
Currently, the only investors for residential mortgages are the GSEs and whole loan portfolios, typically banks. The forbearance policies outlined in the CARES act only pertains to loans purchased by the GSEs (federally-backed). Private investors have fled the market as they face a Hobson’s choice of managing borrower late payments and potential default in their portfolios. While the Federal Reserve is actively buying GSE securities and cutting fed funds rate to 0% creating extremely low-interest rates for financing bank’s balance sheets, the PLS market has no support.
A healthy PLS market provides efficiencies in the markets that are important to providing the best mortgage rates and programs for consumers. PLS fills the following important gaps:
Pricing efficiency: The PLS provides competition to GSE g-fees and loan level pricing adjusters,
Non-conforming & Jumbo Liquidity: Without the PLS market, the only investor for jumbo loans would be portfolios, usually banks. PLS gives access to other investors who purchase securities with different credit and cash flow characteristics.
Non-traditional Lending: Not to be confused with subprime, there are thousands of highly creditworthy borrowers without traditional W-2 income, or who rely on assets to qualify.
As we adapt to the post-COVID market, we will need to find a place in our strategy for the resuscitation of the PLS market.
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