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Lockhart Addresses Secondary Market Modifications

James B. Lockhart III, director of the ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) overseeing GSEs Fannie Mae and Freddie Mac, recently spoke with members of the ""American Securitization Forum"":http://www.americansecuritization.com (ASF) about the role the secondary mortgage market must play in the nation's housing recovery.
Lockhart said that his organization and the GSEs intend to work closely with ASF on its ""Project RESTART"":http://www.americansecuritization.com/story.aspxxid=2655 initiative, designed to restore investor confidence in mortgage- and asset-backed securities (MBS and ABS, respectively). ""We need to get the private sector back into the mortgage market, but with much better standards,"" Lockhart said.
Fannie Mae and Freddie Mac have two businesses, Lockhart explained: (1) investing in whole loans and MBS, including their own, and (2) guaranteeing residential and multi-family MBS. The enterprises' retained portfolios pose large market and credit risks because of the products involved, but just this week, the Obama administration announced that it was increasing the GSEs' portfolio limits from $850 billion to $900 billion, to allow them to support the market with added stability.
Currently, Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks own $255 billion unpaid principal balance in private-label residential mortgage-backed securities (RMBS) - that's 14 percent of single-family private-label securities (PLS) outstanding. Fannie Mae and Freddie Mac have wrapped an additional $13 billion unpaid principal balance of such securities, which they now guarantee for third-party investors. According to Lockhart, subprime and Alt-A mortgages constitute the overwhelming majority of mortgages backing these securities for Fannie and Freddie, while the Federal Home Loan Banks have very little subprime PLS.
While Fannie and Freddie own or guarantee almost 31 million mortgages - about 56 percent of all single-family mortgages - the mortgages they own or guarantee only represent 19 percent of serious delinquencies, Lockhart explained. On the other hand, private-label MBS represent 16 percent of all mortgages but more than 62 percent of the serious delinquencies.
Lockhart said, ""If we are going to stabilize the housing market, we have to address that 62 percent,"" laying the challenge directly at the feet of ASF members.
According to Lockhart, several factors have led to a steady rise in these serious delinquency rates over the last 18 months. ""The most pervasive factor,"" Lockhart said, ""was the lack of underwriting discipline in the 2005 through 2007 period, which was dominated by private-label securities. Investor demand was plentiful regardless of credit quality given the assumption that house prices would continue to rise,"" a false assumption made clear by current market conditions.
Lockhart continued, ""I have heard for almost two years that it is hard to modify PLS because of the constraining trust and pooling and servicing agreements."" However, Lockhart added that just last December, he met with several major trustees and independent servicers, and was told by them that there is a lot more flexibility to those agreements than has been used.
The FHFA has worked closely with the Corporate Trust Committee of the ""American Bankers Association"":http://www.aba.com to provide information to servicers on how to best work within PLS pooling and servicing agreements in order to proactively pursue loan modifications. Lockhart said his organization and the GSEs have also been working with independent mortgage servicers to obtain financing for the advances they are required to make to PLS trusts for these modifications.
According to Lockhart, ""There will be no excuses going forward not to aggressively pursue standardized modifications to prevent foreclosures and lessen their negative impact on communities and the nation’s economy.""

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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