The U.S. government will have to reduce its competitive role in the mortgage market to entice private investors to return, even if it means higher borrowing costs in the transition, the chief executive officer of Redwood Trust said on Monday.
Martin Hughes, whose company has been the sole issuer of private mortgage-backed bonds since the financial crisis deepened in 2008, said private lending would increase if the government reduced the size of loans it guarantees from near
The Redwood chief, speaking at the American Securitization Forum conference, has support from U.S. Congressman Scott Garrett, who minutes earlier on the same stage reiterated that he would push for a complete exit of government support for the market as reforms are tackled this year.
The Obama administration is expected to announce plans for overhauling the government-dominated mortgage finance sector as soon as this week.
Reducing government support has been a sensitive issue, however, at a time when the housing market slump threatens to head into its fifth year. Federally supported entities' share of the mortgage market has nearly tripled to about 90 percent, providing a safety net as private lenders and investors fled during the financial crisis.
Investors are ready to take back the reins, said Hughes, whose company profits by holding the riskier parts of securities as a credit enhancement for other investors. Pitfalls of a transition, such as the possibility of higher interest rates, must be faced if the uber government support of the mortgage market is to end, he said.
It's a circular, self-fulfilling argument that rates will skyrocket if the government withdraws from the mortgage market without an active private market, Hughes said. Sooner or later, hopefully sooner, the status quo has to be tested.
Garrett, who called for a reduction in the limits on loans that can be guaranteed by U.S. mortgage finance giants Fannie Mae and Freddie Mac, questioned how much rates would rise if the private market took over soon.
The arguments of Hughes and Garrett are not completely out of line with the Obama administration, which on Friday said a goal of its mortgage finance reform is to reduce the government's role in the market significantly. The Department of Housing and Urban Development has been raising the cost of its backing for new loans to protect itself from risk, as well as to help steer borrowers back to private lenders.
We are considering what else needs to be done in that context, Bob Ryan, chief risk officer for the Federal Housing Administration, said on another ASF panel. We are conscientious of (FHA insurance) premiums getting to a level that is supportive of other participants entering the market, he said.
Some investors have said they need more protection before they will commit capital to the mortgage market.
Redwood Trust in November advocated a federal law that would prohibit banks from making home equity loans without the consent of the first mortgage holder. This would build investor confidence by preventing borrowers from piling on debt to a point where they are more likely to default in a market downturn, it said.
But Hughes said on Monday that structural issues in the way mortgages are put together are not enough to stop the revival of private mortgage bonds.
We think that is a red herring, he said of claims of low investor interest. Yes, they have demands: Disclosure, collateral, structural protections ... but if you meet their demands ... we think there's an abundance of private money that is going to come back.
(Editing by Dan Grebler)