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Self regulation taking shape in US residential real estate

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* Residential lenders setting sights on non-GSE lending

* RMBS industry mulls way to self regulate

* Economics of securitization still unattractive

By Joy Wiltermuth

NEW YORK, May 2 (IFR) - Private capital is once again poking around opportunities in residential mortgage lending, but with some new RMBS originators looking for a change from the good old, bad days.

One such idea is for a new investor oversight role to be stamped into each new private label transaction, an attorney told IFR. Pacific Investment Management Company, with US$1.94trn assets under management, is said to be among the potential anchor bond buyers mulling the option.

The watchdog position would likely revolve from deal-to-deal, but would also look to draw upon a big firms' due diligence capabilities to attract other investors to the still-stifled private RMBS space.

Representatives from Prudential Financial, MetLife and BlackRock all spoke on panels this week focused on ways to revive investor confidence in the RMBS market. Standard & Poor's held a session Monday, while CoreLogic held a second summit on Thursday.

The expectation has been that private securitisations will fill some of the void left when regulators dial back the government sponsored entities' 80% mortgage market presence, even though prospects for a quick overhaul of mortgage giants Freddie Mac and Fannie Mae dimmed this week.

A 22-member US committee delayed its vote to move forward to secure full Senate support for the bill set forth by Senators Tim Johnson and Mike Crapo.

"You can't just have issuers or rating agencies or servicers designing the new model for RMBS," said Chris Haspel, head of capital markets at Fenway Summer.


Fenway Summer, an advisory and investment firm founded by Raj Date, the former US Deputy Director of the Consumer Financial Protection Bureau, is one such firm making headway. In April, it merged its mortgage originator arm with agency originator Ethos Lending, the name under which it will operate.

Its plan is to start originating GSE-eligible qualified mortgages, and to move into high-quality, prime and super prime loans that fit outside of the "QM" box and are not saleable to the GSEs, once momentum builds.

That could mean interest-only loans to borrowers with good FICO sources, and loans to high credit borrowers with debt-to-income ratios above the 43% threshold. Ethos Lending will ultimately want to securitise, selling the senior bonds while retaining the bottom of the credit stack.

Before that happens though, private label Triple As need better liquidity and a competitive edge on pricing. Private RMBS Triple As are generally 2.5-3 points lower than equivalent coupon Fannie MBS securities, said Trez Moore, managing director at Royal Bank of Scotland, speaking at the CoreLogic conference.

As its stands now, only agency MBS and risk-sharing GSEs deals are highly liquid as they trade with an implied full US government guarantee.

Others firms, including banks, are also looking at non-QM lending, particularly to high-net-worth individuals, but with the likely intention of holding these loans on their balance sheets, Moore said.

That's because banks get more favourable treatment for holding loans in unsecuritised rather than securitised format under Basel III, even though the later offers credit enhancement through subordination and other structural features.

"There is a lot of talk, but right now little-to-no desire to securitise these assets," Moore said.


Private capital currently represents only a sliver of the roughly US$20trn housing stock in the US, according to Laurie Goodman, director of the housing finance policy centre at the Urban Institute.

Equity accounts for about half of that total. But on the debt side, the GSE market tally is 56%, with non-securitised GSE balance sheet loans representing another 5%.

Loans in portfolios of depository institutions make up 24%, private-label 8% and second liens 7%. But even with GSE reform likely on the backburner for the next couple of years, the annual non-QM lending opportunity is still estimated to be sizeable, at roughly US$100bn.

That's why market participants are gearing up for deals.

Limited staffing on the buyside remains a problem for the private-label market, which was reopened by Redwood Trust in 2010. Even the world's largest firms find it difficult to dedicate resources to sift through 400-page deal documents to ferret out unloved clauses, a source at one of these firms said.

Still, they are keen to avoid previous mistakes. Among their chief concerns is that documentation still goes too far to limit the liability of originators, even though post-crash RMBS deals have improved in terms of more robust pre-sale disclosures and data samples.

That speaks to other potential facets of the anchor-investor role, which also could include enforcement powers like removing a deal's servicer and monitoring its collateral performance.

This is not the only change on the table.

Private lenders, including Shellpoint Partners, have been working to re-write the structure of new deals. To do so, it has brought together investors, originators, rating agencies and data firms to draft a "perfect" RMBS trust.

The rough outline includes an enforcement mechanism for representations and warranties breaches, embedded due diligence, better data and disclosures and transparency across deals.

"We do want to avoid what we just went through," said Eric Kaplan, managing director of mortgage finance at Shellpoint.

(Reporting by Joy Wiltermuth; Editing by Anil Mayre and Natalie Harrison)