How Private- Label Investors Are Beating The GSEs at Their Own Game
Fannie Mae and Freddie Mac enjoy considerable market advantages because of their lower cost of capital and significant government subsidies. But with some conforming loans, the private market is finding a way to compete with the government-sponsored enterprises.
“Overall, it’s newsworthy that, my gosh, there might be a better execution out there than the GSEs’ for some product,” said Tom Millon, the president, CEO and chairman of the Capital Markets Cooperative.
More high-balance conforming mortgages with strong credit characteristics are finding their way into private-label mortgagebacked securities, according to a recent Moody’s Investors Service report.
The mortgages, known as “conforming jumbos,” exceed the standard $ 453,100 GSE conforming loan limit, but are still eligible for purchase because they’re originated in high-cost areas.
So while the GSEs will buy conforming jumbo mortgages, private- label investors can often offer better pricing because of the loan- level price adjustments Fannie Mae and Freddie Mac must charge to account for their higher- risk profile. This is especially true when a lender has more conforming jumbos to sell than the 10% cap that the Securities Industry and Financial Markets Association puts on GSE to- be- announced loan pools, Moody’s added.
For those loans, “you can definitely see private-label execution for the very highquality loan being better than the GSEs,” Millon said.
Lenders such as HomeBridge Financial Services, loanDepot and Flagstar Bank are preparing to or have already done deals consisting of agency-eligible highbalance loans in the private-label market.
“The credit quality of GSE- eligible mortgages included in private- label RMBS collateral pools has thus far resembled that of prime jumbo loans more than that of GSE- owned loans,” Moody’s SVP Yehudah Forster said in a press release. “The inclusion of the GSEeligible loans in private- label RMBS is therefore mainly credit neutral.”
The Moody’s report mentioned several other categories of traditional conforming loans where a private-label execution might get better pricing than from Fannie Mae and Freddie Mac. These included high credit score loans with low LTVs, loans with lower debt-to-income ratios and cash-out refis with strong credit qualities.
But unlike the high- balance conforming and the investor loans, the pricing differences between private- label and GSE deals would be more marginal, Millon said.
Private-label execution has become more viable in the past year than previously, added David Battany, currently the vice chairman of the MBA’s residential production committee.
Part of the reason is that the GSE riskbased pricing structure intentionally overprices the credit risk on these categories of loans in order to subsidize the pricing of loans for first-time homebuyers that have high LTVs, low credit scores and high DTIs.
“When the GSE are the only game in town, it doesn’t matter so much because everything is going to the same source,” said Battany, who is the executive vice president, capital markets at Guild Mortgage Co. But now, private-label execution is becoming more viable and that brings up another problem, the potential of adverse selection of loans being sold to the GSEs.