“When the Mortgage Market is working, loans get approved and closed.”
It’s been a frustrating four years since the mortgage market blew up in our faces. After two newly instituted compulsory exams, lots of new regulations (both federal and state), and 400 imploded lenders later, we still don’t have a positively charged mortgage market. Individuals with equity in their properties, provable income on their tax returns, and at least six months of mortgage payments in the bank are the only ones able to get financing. On the other hand, the self-employed and the commission earners with weak tax returns, and underwater borrowers don’t really have any options available in this market at this time. (Just to be clear, the underwater borrower who doesn’t have a loan owned by Fannie Mae or Freddie Mac, originated prior to June 1, 2009 has no options). We’ve had HAMP, HARP, Desktop Underwriting (DU) Refi Plus, Open Access, and countless other programs providing a plethora of alphabet soup for the fortunate pre-June 09’ Fannie or Freddie borrowers, but for the Alt-A, subprime, stated income, no-doc, no income, or stated asset borrower who iscurrent on their payments, there is no relief in sight. I believe they deserve relief too. Well, here are a few ideas to make the mortgage market work:
Allow alternative investment entities originate real estate mortgages
There are over 472 investment entities around the world with at least $10 billion in investable capital. That’s nearly $5 trillion waiting to be deployed into investments. There are hedge funds, mutual funds, private equity funds, insurance companies, and private individuals looking for investments. Accordingly, they should wholeheartedly participate in our anemic market by underwriting transactions or structuring mortgage pools that would yield investors 4.50% – 6.00%. This already occurs at the hard money level.
Originate and securitize non-Fannie and Freddie borrowers
Real estate is the most visible, understandable, and historical asset that individuals or entities can invest in. Bought “right” as an investment class, it offers stable cash flows that are predictable and consistent. It’s not as sexy like Facebook, but there won’t be the post-IPO heartburn that many investors have had during the first two weeks following the first day of trading of the social media mega machine. As such, many investment houses should consider an origination, securitization, distribution, and servicing platform that is geared and caters to the non-Fannie/Freddie marketplace that is busting at the seams with unserved borrowers. Those with mortgage investment banking (IB) experience can startfrom scratch with IT and their rolodexes, or can partner with large, small, or mid-sized IB-firms that have the capability to underwrite, market, and distribute the paper to the masses while recycle capital to make new loans.
Consider public-private partnerships
Finally, public-private partnerships should be considered to get the mortgage market working. As witnessed throughout the Great Recession, the federal government has a propensity to engage in various forms of “partnership” with the private sector when the returns look favorable or it just needs to get a messy situation off of its books (e.g. JP Morgan Chase’s acquisitions of Washington Mutual and Bear Stearns in 2008). In the Chase example, the government was trying to contain a pure catastrophe with both institutions. After both banks encountered meltdowns and subsequently taken over by the regulators, Chase purchased both wounded entities for cents on the dollar. The caveat was that the federal government provided a backstop to Chase against potential losses. From thatinstance alone, one can clearly see that when the motivation is there, the government will guarantee private industry against losses in order to avoid an economic tsunami.
In the end, private industry will move from the sidelines and provide real estate capital to interested parties. There is a whopping $4.72 trillion dying to put its dollars to good use. Even though the Dow is off and Facebook has lost 25% of its IPO value, tenants still need a place to stay and consistent monthly cash flow is still king. There are a lot of out-of-work or underutilized finance professionals with the origination, securitization, and distribution experience that can recycle and refresh the mortgage market with more capital to book new loans. Most importantly, there are millions of ready, willing, and able-bodied borrowers dying for scarce financing. Redwood Trust is already in the game originating and securitizing non-Fannie/Freddie loans. So, how many more will follow suit and how long will we have to wait?