Before considering the question of when a secondary market for nonconforming loans might return, one should ask whether it should be revived in the first place. That's what participants in a recent panel discussion at the Mortgage Bankers Association's National Secondary Market Conference in New York pondered.
The panelists included Stephen M. Calk, chairman and chief executive of Chicago Bancorp and The Federal Savings Bank; Jon Daurio, former chairman and CEO of Kondaur Capital Corp.; Martin Goodman, president of LoanMLS; and Avi Naider, CEO of ACES Risk Management Corp.
Opinions were mixed. An interest in yield drove arguments for a cautious and eventual return of subprime credit, perhaps in a new form. But others warned that a return of investor trust and the re-establishment of lower-risk nonagency parameters must come first.
The following is an excerpt of the discussion, which was moderated by National Mortgage News editor Mark Fogarty.
MARK FOGARTY: When will there be a viable secondary market?
DAURIO: We're seeing the beginnings of securitization come back on jumbo loans and we also securitize some nonperforming loans and the ability to continue to securitize nonperforming loans and jumbo loans appears to be getting more robust.
We're seeing an influx of people coming to market forming [real estate investment trusts] with potentially an idea that a REIT will be the place to raise money to purchase and hold these loans. When? That's the unknown, but at least there's movement in that direction. But I would say it's like a journey of 1,000 miles and we've only made the first few steps.
FOGARTY: Why would a REIT structure be helpful?
DAURIO: The REIT structure already has in place retained risk in the sense that the way the REITs are, you have to distribute 95% of the income but retain 5% of the income.
So it's a lot easier or it's more acceptable … to have a REIT structure, where now they are trying to figure out how to mandate originators or the entities that are securitizing the loans to maintain more risk than just owning residuals.
FOGARTY: Anyone else have an opinion about when we are going to see a robust nonconforming secondary market?
NAIDER: Within the next couple years you are going to see entry of private buyers into the market, and it's going to be primarily driven by quality perceptions.
The analogy I like to use is in the auto industry, when a car company has a big problem and their brakes fail on cars and consumers shy away for a little while because nobody wants to buy a car where you think your brakes might fail. Well, when consumers were buying loans and securities that had good yields relative to safe investments but actually poor yields relative to risky investments, there's a risk perception or perception of high risk, you're just not going to see that high participation in the market.
What's ultimately going to happen is that understanding of what's going on within the industry starts getting out there, and they understand that the loans that are getting generated right now have a much higher quality than those of several years ago and the constraints are much tighter. You're going to start see investors who want those higher yields where they perceive that the investment grade is pretty safe, they're going to be returning to the market.
GOODMAN: We've all felt a betrayal of trust. We trusted that a securitization is what it says. We trusted the loans were what they said and the truth of the matter was most of them were not.
And technology, in particular, is allowing us to peer down and drill down much easier than it was even five years ago to see what's in this pool.
The other thing that's interesting is we're seeing a new type of subprime borrower. We have lots of people that have excellent jobs with verifiable income, but they had a slew of rental properties. … It's going to be a very long time before any of us go back to the type of subprime lending standards that existed.
We would never do that, but there is a whole new class of subprime borrower out there and there's a ton of private money going after that. Technology is going to let us marry the buyers and sellers. In many cases we're finding originators are going outside the traditional channels of building up in a warehouse and then securing it, going after microsecuritizations.
DAURIO: That's how it was in the beginning with the securitizations, at least, I know, the ones that I worked on.
CALK: Back to your original question regarding a robust secondary market.
I think before we can get into the esoterics of subprime lending or getting technology platforms for that … we really need to address a couple key topics. One, what is [a qualified residential mortgage] going to look like? And although there might be some jumbo or other for lack of a better word alt-A or esoteric products out there, until we understand what the core product market is going to be and what that's going to look like, we won't know whether there is going to be a robust market because we won't know really what those yields are.
