BlackRock paves way to reshape mortgage market
BlackRock’s new $1 billion jumbo mortgage fund paves the way to reshape the U.S. mortgage market. If its blue-chip presence tempts others to follow, it would reopen the private mortgage securitization market, reduce the need for federal guarantees and bypass many of the conflicts and practices that contributed to the housing-led economic crisis.
The idea, first reported by Reuters, is pretty simple: rather than buying mortgage bonds from lenders, the asset manager will buy packages of loans from the banks instead and bundle them into securities itself. It’s not the first to do so — in April Redwood Trust sold the first, and so far only, mortgage bond in more than two years not backed by government-run entities like Fannie Mae and Freddie Mac.
But BlackRock brings considerable cachet and financial firepower. Recent regulatory changes should make the idea more appealing to banks, too. An earlier draft of the financial reform overhaul envisaged making lenders retain 5 percent of any mortgages they sell to other investors; but the final version limited it to mortgage bonds, exempting whole loans.
That doesn’t mean responsibility for risk will disappear into the ether again. Keeping slugs of their securitizations, especially the lower-rated slices, is how the asset managers intend to make money. Still, BlackRock has taken a number of other steps to remove conflicts. For instance, it is employing a servicer not affiliated with the original lender and, if practical, would like to appoint an independent third party to arbitrate any disputes over problem loans.
The key will be convincing bond investors the assets are squeaky clean. To that end, BlackRock isn’t merely imposing conservative loan-to-value and down-payment ratios on lenders; it also insists the loans it buys are only made to borrowers with stable assets and good track records of earning money and paying debts. Nor does it want borrowers who immediately gear up with a home equity loan. Further, BlackRock will check all the loans itself before repackaging them.
There are still hurdles — not least fears of further house price declines. And the private market won’t be able to compete financing jumbo loans until Fannie and Freddie drop their guarantee limit, which was raised to $729,000 in the crisis. With the likes of BlackRock ready to take up any slack, there’s no reason such taxpayer-backed warranties should stick around for long.