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With Securitization Down and Out, Home Prices Will Falter


Big banks keep making big noises at any opportunity about how they’re doing their bit to keep the economy going and making new loans. MBS analyst Laurie Goodman at Amherst Securities Group in New York City, one of the best MBS shops on the street in my opinion, begs to differ. In a report issued today, Goodman acknowledges that the ongoing skid in home prices (a 32% decline in home prices from the mid-2006 peak, as measured by the S&P/Case-Shiller 20-City Index) is due to over-extended borrowers in bad loans. Yet, she says, another factor is contributing to the declines just as much: a lock-down on mortgage credit, i.e. banks still aren’t lending.

The main culprit is that the securitization market, or the secondary market where investors buy these mortgages as investments, is still in lock-down mode. Even though the Fed has spent $531 billion of the $1.25 trillion it has allotted to buying Fannie Mae and Freddie Mac mortgages, “that’s done little to address credit availability," Goodman writes.

If a bank makes a loan, it must either hold that loan on its balance sheet, or securitize it. Since the securitization market has shut down, all the loans made now are staying on the books. And that's added pressure for banks already constrained by capital needs.

Here are some numbers from Goodman's report which drive the point home: In 2008, there were $97 billion of prime jumbo mortgages (which are outside the parameters of conventional loans bought by government agencies, Fannie Mae or Freddie Mac) with just $6.6 billion of that sold on the secondary market and the rest held in-house in banks' portfolios. In 2006, by contrast, $480 billion was originated with $219 billion of that turned into MBS pools, leaving $261 in banks' portfolios. By Goodman's calculations, that means that securitizations are down 97% and portfolio originations have fallen 66%.

The solution? According to Goodman, lower standards “somewhat.” Second, she writes, the market has to be opened to allow greater participation by investors. That means expand TALF to cover new residential mortgages that don’t fit within the Agency criteria, but allows banks to underwrite the loans and sell them off. She adds that owner and non-owner occupied properties should qualify, among other things.

“It is certainly the case that the extension of mortgage credit to risk-layered borrowers who put down little to no equity was responsible for the credit crisis,” she writes. “However, the pendulum has swung too far in the opposite direction, which is impeding a housing market recovery."


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