I participate in various e-mail threads where people chat among themselves (my hedgie bunch can be wickedly funny on slow market days) and one of the groups is focused on the mortgage mess.
I thought readers might be able to help with a query from one of the participants:
On May 23 the House Financial Services Committee will be having a briefing session on Securitization and risk retention proposals under Dodd-Frank. The following parties will be presenting and available for questions:
· David Moffitt, Global Head of Structured Solutions and Securitization, Morgan Stanley
· Tom Deutsch, Executive Director, American Securitization Forum
· Evan Siegert, Managing Director, Senior Counsel, American Securitization Forum
· Jim Johnson, Managing Director, Public Policy, American Securitization Forum
He is skeptical of the Dodd Frank risk retention rules and asked:
Does anybody who thinks differently have any questions regarding risk retention that should be asked of a person listed above? How about questions for any of these participants regarding securitization generally?
I find it impressive that the American Securitization Forum, which to date has been consistently in the wrong on foreclosure fraud and chain of title issues, is still treated with such deference, particularly since the sell side of the securitization industry, which is what the ASF represents (despite its pious claims otherwise) has fought meaningful securitization reform tooth and nail, with the result that the industry is almost entirely on government life support. Therefore I hope readers can come up with some suitable questions.
One participant in the thread gave me permission to post his questions to provide a point of departure:
The ASF seems very well staffed for a trade group representing a blown up industry!
Presumably tomorrow, the ASF will be requesting an exemption to the risk retention proposals for MBS – they have stated that they prefer that sellers retain a vertical rather than horizontal slice of risk in a deal. They suggest that requiring a horizontal slice would be too onerous and might damage the fragile recovery underway in MBS market (their words).
1. Since mortgages are the securitized asset class that exhibited the worst lending and issuance performance and have demonstrated repeatedly that such failure was because the incentives lenders and issuers were not aligned with investors, why should this asset class get any exemption from risk retention rules? In contrast sub-prime auto loans have performed comparatively well, yet no exemption is requested for this asset class, why is that?
2. The problems with mortgage securitizations continue to unfold years later, including billion dollar disputes regarding the quality of the mortgage loans. Have lenders and issuers demonstrated any understanding of why so many bad things happened to their mortgage lending standards and their mortgage loans? Rather than retaining risk, wouldn’t it make more sense to require lenders and issuers to pass a test demonstrating that they now understand underwriting and credit and they have analyzed their performance history and identified the sources of the high failure rate of their loans and instituted policies to protect against such failures in the future?
3. European regulators have not permitted an exemption for MBS in their jurisdictions, yet, by most accounts, their MBS performed better than similar vintage US MBS – why should US MBS be permitted a lower standard?
4. The ASF proposes that mortgages with 5% down payments are sufficient to be “qualified residential mortgages”, provided they have mortgage insurance – yet most mortgage insurers are substantially undercapitalized and have been downgraded to barely investment grade levels and their defaults would have a catastrophic impact on investors Fannie and Freddie and, ultimately, taxpayers. In addition, they are rescinding insurance coverage on a widespread basis, exposing investors to significant potential losses. Why should such loans be given an exemption under any circumstances?
5. Have lenders demonstrated any ability to originate mortgages with 5% down payments in an appropriate manner since the crisis? Have lenders demonstrated any scenarios under which such loans represent reasonable risk for investors on a non-government guaranteed basis? If not, why should such loans be subject of an exemption?
6. The ASF repeatedly asserts that various more stringent requirements for mortgages would make the affected loans more expensive for consumers. However, the ASF fails to articulate why this should be seen as a negative consequence. Shouldn’t loan types that have demonstrated a propensity to default at significantly higher levels be assessed with a comparatively higher interest rate? Shouldn’t borrowers who have historically demonstrated weaker performance be assessed with a higher interest rate? For borrowers who put down only 5% on a home, or have higher debt to income ratios, adjustable rate loans, or limited ability to verify their income or assets, wouldn’t a higher interest rate discourage or limit such borrowing and, thus reduce risk in the market place?