Mortgage Lending: Signs of Life In The Wasteland

The mortgage lending market has gone through some trauma since 2007.  For illustrative purposes let's liken the damage done to the mortgage lending business to the effects of a volcanic eruption...in this case Mt. St. Helens specifically.

Here is a picture of the as a lush forest pre-eruption.  Look at all those pretty trees living happily basking in the sun.  Think of each tree as a mortgage lender and the abundance and health of the trees in this photo as a representation of the Mortgage Industry in 2007.

Then, trouble brews and a cataclysm befalls the forest as Mt. St. Helens blasts the life out existence.

Uh oh!  Think of this as a visual representation of what happened to the mortgage industry after the housing crash of 2008.

Yet, with every disaster, there is renewal.  Here is a photo shortly after Mt. St. Helens erupted:

This looks like a lifeless moonscape.  How could anything live in this environment?

Well, lo and behold, there is life!

Please forgive the labored analogy.  The point I wanted to make today was that, as in all natural disasters, life goes on and nature has a tenacious way of springing up and clawing its way back from obliteration.  The same goes for the mortgage lending market for housing.  Just this week we get two very interesting headlines from Housingwire:

Redwood Lines Up Another Jumbo RMBS
Redwood Trust, the only company to launch private-label residential mortgage securitizations since the financial crisis began in 2008, is issuing the RMBS.  Redwood will bond 473 loans with a total balance of approximately $375 million.

This is good news!  Morgtage backed securities have been dead for nearly three years with Redwood being the recent innovator and initiating the creation of more of these products.  They anticipate doing another $1 Billions in RMBS this year.  Good for them.  Good for us.

Also we read today:

Banks May Skirt GSE Uncertainty With Covered Bonds
More banks based in the United States will establish covered bond programs to fund future mortgages on the perception of less risk and still lingering uncertainty over private and agency securitization markets, according to Moody's Investors Service.

New covered bond frameworks could take the place of mortgage-backed securities issued by either the government-sponsored enterprises or the private market.

-snip-

"New covered bonds in the U.S. will also not have the low quality assets that were common in pre-crisis residential mortgage-backed securities." Moody's said in a research note released Tuesday. "We expect future U.S. covered-bond deals will have much less market risk following a bank default than pre-crisis U.S. covered bonds because we assume future covered bond legislation will establish mechanisms permitting liquidation of a portion of the pool over a period of time."

What this is saying is that banks are seeing the writing on the wall that Fannie Mae and Freddie Mac's days of market dominance are numbered.  If the demand for home loans is going to be satisfied, banks will need to find other ways of meeting that demand than originating loans and sending them to Fannie or Freddie.  Thus, traditional banks have started to use tools called covered bonds to provide incentives for the creation of new home loans.   

Both of these reports show that the market is innovating and adapting to survive in the inevitable post-government-dominated mortgage market.