Can Deal Agents Fix a Fading PLS Market?

Private-label securities‒‒mortgages without government involvement‒‒ have been a bit player since the financial collapse of 2008. And according to Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute, deal agents may just be the way to bring the sector back.

In a recent report on the state of the PLS market, Goodman wrote that the securitization of products with no government involvement “has been trifling compared with both 2005 to 2007 and earlier periods.” According to her report,  new prime securitization was $12.1 billion in 2015, which is less than 9 percent of the $142 billion total of 2001. Likewise, private-label securitization of newly prime, Alt-A, and subprime mortgages totaled $13.7 billion last year, compared to $240.6 billion in 2001.

“During the crisis,” Goodman wrote, “the PLS mortgage market suffered the most dislocation of any securitized product group because of severe and widespread home price depreciation.” This, she added, highlighted the structural weaknesses of these securities, and those weaknesses are, in turn, made worse by investor perceptions that the many conflicts of interest between servicers and investors have yet to be adequately addressed.

The federal government has spent the better part of the last 18 months talking with institutional investors, issuers, servicers, ratings agencies, due diligence firms and other key stakeholders to discuss reforms needed to restart the PLS market, Goodman wrote. But while some ideas are being bandied about, the concept of deal agents‒‒those charged with looking out for the interests of investors‒‒is largely missing from existing deals.

This is especially important, Goodman wrote, because “the disappearance of the PLS market has already affected the availability and cost of mortgages for borrowers who do not have the necessary credit to qualify for government-backed loans. And this group of borrowers is larger than it might otherwise be.”

On the servicing side, she wrote, “the deal agent would make sure servicers focus on maximizing the value of the assets and do no self-dealing” as well as ensure compliance among servicers. “The deal agent would also have the ability to pursue claims against servicers,” she wrote, “even terminating them if necessary.”

If standardization regarding deal agents’ roles can be set, she said, it would go a long way towards repairing a flagging PLS market in need of an overhaul.

Click here to view the full report.