NEW YORK (CNNMoney.com) -- A group representing the buyers and sellers of mortgage backed securities unveiled a plan on Wednesday to recharge the moribund mortgage securitization market.
As the housing crisis hit last year and losses in mortgage backed securities began to pile up, investors stopped buying packages of residential mortgages from lenders. That's made it harder for home buyers to get loans from cash-strapped lenders.
But now the American Securitization Forum hopes its plan, Project RESTART, will increase the supply of mortgage loans available to borrowers and lower their cost. Jump starting the secondary market could provide a needed boost to the struggling housing market.
"Project RESTART's goal is to rebuild confidence in investors in these securities," said Tom Deutsch, ASF Deputy Executive Director.
This task is especially critical as fears continue to swirl about thehealth of the government sponsored enterprises, Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), which also buy loans from lenders to package and sell on the secondary market. For the past year or so, Fannie and Freddie have provided the bulk of mortgage funding, adding to the strain they are under.
This plan aims to revive the segment of the secondary market that trades in mortgages that are not backed by the two mortgage giants.
"Mortgage credit is extremely constrained," said Tom Deutsch, ASF's Deputy Executive Director. "The market is not functioning as it should and this is one of the ways that will help restart it."
The plan calls for increasing the transparency of the securitization process, so that investors can more clearly understand the nature of the mortgage pools they purchase. That would allow investors to better assess the risks and rewards of individual pools and judge their pricing more accurately, and should encourage then to resume buying these securities.
Ideally, according to Deutsch, the financial information on each individual mortgage borrower in a pool of loans would be available to investors. That's not practical. But by having lenders aggregate the borrower data in a standardized way and then disclose the character of the securities as transparently as possible, he hopes to accomplish nearly the same thing.
Pools of mortgages, for example, could be structured so that all the loans in them share many of the same traits. One pool might only contain loans from prime borrowers who have fully documented their income and their assets, put down a down payment of at least 20% and have credit scores of 720 or greater.
A conservative investor looking for a low-risk but moderate revenue stream might opt to purchase a piece of that pool.
On the other hand, more risk-tolerant investors might prefer a piece of a pool featuring all subprime borrowers with low credit scores that would offer a higher rate of return. The key is that each of these investors would know what they are buying.
Initially the focus will be on residential mortgages of all types, jumbo, prime, Alt-A and subprime, according to Patrick Greene, a senior vice president of Wells Fargo Bank and (WFC, Fortune 500) a member of the panel that worked on the plan.
"Wells Fargo ... spends every day thinking about how we can create more liquidity," he said.
And ASF has big plans to eventually apply the same kinds of processes and standards to other consumer debt that is securitized, including student and auto loans and credit cards.
The ASF has asked industry participants to submit comments on the plan between now and Aug. 22, and the plan will be adjusted accordingly. Deutsch is optimistic.
"This is an initiative with significant support from the industry, as it was developed by participants in all areas of the securitization market," he said. "We expect to see widespread adoption of the [plan]."
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[Via Home Mortgage Rates and Real Estate News]
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