A diverse group including troubled borrowers, low-income renters, mortgage-bond issuers and investors in those bonds will get a boost from new Treasury efforts to keep capital flowing in the mortgage market.
Marking the fifth anniversary of programs designed to aid borrowers in the wake of the credit crisis, Treasury Secretary Jacob J. Lew is pushing forward with efforts to continue the recovery. The department will start an initiative to revive the market for mortgage securities without government backing, begin offering financing for loans for affordable apartment buildings and extend aid programs for troubled borrowers for an additional year, Lew said yesterday.
Together the moves are aimed at problem spots that remain in the real-estate market as credit remains tight, housing becomes less affordable, and home prices remain depressed in many areas.
"Middle class families continue to find it difficult to find affordable housing," Lew said during a speech in Washington. "And more than 6 million Americans still owe more on their homes than their homes are worth. That is why we remain focused on providing relief to responsible homeowners, rebuilding hard-hit communities, and reforming our housing finance system."
Homeowners having trouble making their loan payments will now have until December 31, 2016 to apply for a mortgage modification under Treasury's Home Affordable Modification Program and other Treasury-run aid programs. The affordable apartment building loans would be backed by the Federal Housing Administration and state housing agencies.
Lew said he would direct senior staff to bring together institutional investors and issuers of mortgage bonds to develop guidelines to reassure both sides that they won't be saddled with unfair losses. Treasury will also seek public feedback on how the market should work, he said.
The market for bonds without U.S. backing, known as non-agency securities, has remained mostly frozen since the 2008 credit crisis as both lenders and investors struggle to regain trust after hundreds of billions of dollars in losses. Though the government is limited in what it can do to force private parties to agree, the effort could invigorate work by the industry to set new standards for transparency and responsibility.
"We think it's absolutely fundamental that regulators and the administration are involved in all aspects of trying to revive this market," Richard Johns, the executive director of the Structured Finance Industry Group, said yesterday in a telephone interview.
The government has dominated the issuance of mortgage securities since the crisis, with U.S. agencies and government-backed firms such as Fannie Mae (FNMA) now guaranteeing about 76 percent of new home loans, according to data firm Black Knight Financial Services.
After showing signs last year of heading toward a fuller revival, the market for non-agency securities stalled again as 2013 wore on, stunted by banks paying more for loans to hold on their balance sheets and bond investors paying less for the safest portions of deals.
Banks, which say they've been pushed to bear billions of dollars in costs for underwriting flaws unrelated to the causes of defaults, are seeking to better protect themselves before selling more securities. At the same time, bond investors including Pacific Investment Management Co. and BlackRock Inc. (BLK) say it's been too hard to make issuers pay what they should and their own demand for new debt won't fully revive until better processes are in place.
"You have a lot of lingering mistrust and unwillingness to proceed on the assumption that everyone's interests are aligned," said Barry Zigas, director of housing policy at the Consumer Federation of America, a Washington-based group that advocates for consumers. "Now, people are very careful. They are arguing over where does one party's obligation end and another's begin."
Non-agency issuance tied to new loans, which jumped to $13.4 billion last year from $3.5 billion in 2012, totals less than $2.5 billion in 2014, according to data compiled by Bloomberg.
Annual sales peaked at about $1.2 trillion during the housing bubble, fueled by homeowner and investor tolerance of riskier loans that later soured en masse, causing about $450 billion of losses between 2006 and 2012, according to Moody's Analytics chief economist Mark Zandi.
The industry itself is already trying to address the distrust between sellers and buyers of the debt in the wake of the crisis, though previous efforts have failed.
This year, the Structured Finance Industry Group started an initiative known as RMBS 3.0 which brings together market participants to find solutions to issues including contractual promises about the quality of loans and the process for forcing repurchases of misrepresented debt.
Industry participants say there are other things the government can do to help bring private capital back to the mortgage market. Competition from government-backed programs that charge less is among the biggest roadblocks.
Regulators also have been slow to issue new rules governing securitization mandated by the 2010 Dodd-Frank law. Six agencies are still working to finalize the qualified residential mortgage rule, which will require lenders to keep a stake in certain mortgages that they package into bonds.
The Securities and Exchange Commission has struggled to finalize its own series of new disclosure and other rules meant to strengthen confidence in the securitization market, known as Regulation AB. The agency originally released a proposal in 2010, re-proposed the regulation in 2011, and then delayed a vote on its adoption in February to seek more comments over consumer privacy concerns.