ATLANTIC CITY, NJ-Even though investors welcomed the two recently-originated private-label MBS that have been done since the downturn, the non-government secondary market investor in general remains "in hiding," a member of a panel on the future of the secondary market told attendees at the Regional Conference of Mortgage Bankers Associations.
Garry Cipponeri, SVP and head of capital markets for JPMorgan Chase, said people would like to believe the private secondary market is coming back and it will. But the process will be a slow one.
As for the GSEs, Paul Thomas, EVP and head of capital markets for SunTrust Mortgage, noted that the introduction of loan level pricing adjustments would prevent much of the risk layering that increased the likelihood of a mortgage defaulting.
The one GSE representative on the panel, Catherine Lasher, Fannie Mae's VP for the Eastern region, added that LLPAs along with risk-based pricing provide a "critical market discipline for the industry and Fannie." They allow the GSE to serve as a stable source of liquidity and protect the company from adverse selection.
Both Cipponeri and Thomas support the option in the paper that creates mortgage guarantor entities. Thomas said there is a need for some form of government guaranty for the secondary market. The fully private market option is not workable, Thomas said, because we could end up with interest rates borrowers could not afford.
Separately, the president of Radian Guaranty, Teresa Bryce Bazemore, noted there is an explicit role for private capital in the mortgage business going forward. This includes the use of private mortgage insurance. She said her industry's business model has withstood the test of time and it protects the investor.
The MI industry has so far paid $20 billion in claims and will pay another $20 billion before the housing crisis is worked through, Bazemore said.
At Radian, it paid $1.3 billion in claims in 2010 and it expects to pay $1.7 billion in 2011. While Bazemore did not elaborate on the reason, company management has in the past pointed to the large number of loans in its delinquency inventory that are 12 months or more since the last payment.
As part of her defense of the MI business, she noted that loans with some form of credit enhancement, either FHA or private MI defaulted 47% less than the piggyback loans that competed against them during the boom era.
This is because the MIs have invested money for keeping people in their homes, she said.
Bazemore also discussed a policy Radian is developing, Performance Plus, where under conditions, including 24 months of on-time payments, the company will waive its right to rescind coverage. There is a caveat that retains the right if third party fraud is discovered.
The program has approval from the GSEs as well as the Pennsylvania insurance regulators.
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