The End Of Fannie Mae And Freddie Mac? Alternatives To GSE Guarantees.
Like the 800-pound gorilla in the corner of the room that everyone ignores, there is a need for alternative fixed income instruments sought by investors linked proactively to the underlying loans -- performance that is continuously known rather than spot-reported every 60 to 120 days.
With the GSEs days are being debated (and likely numbered), this linkage requires vast data sources that are integrated from customer contact through origination, underwriting, servicing, asset bundling, and of course, investor discovery and purchase.
To accomplish this, alternative fixed income assets beyond explicit government guarantees must be created and embraced with underlying legal structures and recourse.
For example, as lenders there is a need to offer whole loans to the market that private investors will buy.
In the U.S., we have been talking about an alternative asset called a covered bond (CB) along with corresponding laws and issues for U.S. banks for three years. What makes CB's work is their transparency and the information needed from origination to servicing to securitization.
The data and the loans performance will allow the government to get out of the markets (i.e., GSE's), while opening the USA to an already $4 trillion market (e.g., EU, Canada, Australia, etc.) that has been in existence for over 200 years.
The issue that remains is how can originators embrace a new form of loans and information that investors actually want to purchase which is not guaranteed by the government. To clarify, our proposed U.S. law covers nine classes of assets including credit card, student loans, home loans, corporate loans, et al.
We have the potential in the U.S. to generate via originations (new ones) an asset class that would be over $1 trillion in 8 years if originators started seeing how these alternative classes of securities really benefit them.
With these new asset classes come improved margins and an ability to securitize portfolios that help with risk profiles, while allowing private investors to once again have faith in a market process that has remained broken for nearly five years. Using data to ensure transparency and regulatory compliance, these new asset classes represent the best hope since 2006 of restarting private securitization as investors look beyond government controls and declining margins.
With the MBA Secondary Conference ready to kick off next week, the need to identify and embrace alternative funding sources and private investors has never been as great as we begin to establish a bottom of the housing markets and pricing.
However, the codependency between originators and government regulations and regulators has created a market void.The private markets have dried up and the need to craft new solutions is forcing a revaluation of what will be viable for the future.
Yet, the questions for originators are:
- What loans make the most sense and profit to channel investor interest and purchasing behaviors?
- Will these new asset classes require more or less stringent data or reviews?
- How will the assets be bundled and who will provide the ratings needed for insurance and interest dispersion?
Until we can match new alternative asset classes between investors and originators, the markets will remain closed to everyone except the government.