How Pri­vate- La­bel In­vestors Are Beat­ing The GSEs at Their Own Game

National Mortgage News - - Secondary - By Brad Finkel­stein NMN

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.

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