MBS market gets religion (kidding!)

(The biggest April Fool’s joke of the day may be that played by the Federal Reserve on the banks and the housing market — terminating the MBS purchase program just before the $8,000 first time buyer’s credit is set to expire.

Only, it’s not a joke.

A white paper by The Association of Mortgage Investors, recommending reforms and regulations to the MBS market, is also not a joke … but Sue believes Congress will treat it as one.

— Bob)

The Federal Reserve today ended its purchase of mortgage-backed securities. It has been the *only* buyer of the issues by Fannie Mae, Freddie Mac, and Ginnie Mae, since December 2008, single-handedly keeping residential lending alive by shoveling $1.25 trillion into the maws of banks.

During this time there have been no private issuers and few private buyers for these securities, because (in case you’ve been hiding away, a monk in the wilderness, and haven’t heard the news), the underlying assets have tended to suck the big one.

Now what? One private investor group, Redwood Trust, is planning a $200 million offering “as soon as next week.” As Lita Epstein of Housing Watch said, “That’s just a drop in the bucket, but for the sake of home buyers everywhere, I hope it’s a sign of a new flood of interest by private investors as the government winds down its buying spree.”

This is a precarious moment, in which the private market is likely to choke and die. (See my previous comment regarding the historical quality of mortgage backed securities.) So wouldn’t this be a good time for some of that Old Time Regulation stuff?

Yesterday, The Association of Mortgage Investors, a lobbying group for private investors, issued a white paper with 10 “guiding principles” for Congress and federal regulators. “Now that poor credit underwriting, moral hazards, inadequate disclosures, asset servicer conflicts of interest, rating agency failures, and logistical obstacles to working out bad collateral assets have scared investors away from the securitization markets,” the association wrote, “it is important for the government to consider the policy recommendations of investors, whose participation and capital are needed for there to be an asset-backed securities market at all.”

The reforms they seek are primarily to open up the securitization process and allow them to take a closer look at the underlying assets.

The white paper outlines additional fixes to make the market more open and give investors the ability to decide for themselves the risks they should take rather than to depend on credit rating agencies, which did such a poor job prior to the collapse of the mortgage securities marketplace. As investors, they have a right to say they don’t trust credit rating agencies and want to assess the risks on their own.

Will Congress take these recommendations to heart? My prediction is that those proposals by The Association of Mortgage Investors that are disfavorable to the bottom lines of the banks and the pockets of the bankers, such as regulating conflicts of interest, will be stripped away.

Other proposals will be added to current banking reform bills, but will be made “voluntary.” Any provision making the deal memo open and subject to regulators will be taken out back of the Capitol building and shot in the head. What will result … eventually … is a watery, toothless regulation. The MBS market will stagger, banks will be unable to unload their loans, lending will falter, mortgage rates will rise, and the Government will be forced to resume their buying program. But I could be wrong about that. Let’s see, shall we?

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