Can The Secondary Market Hurt Mortgage Lending?

The Mortgage Bankers Association held their annual Secondary Market Conference in New York City. Much of the discussion was centered on how to revitalize the private securitization market which has not recovered to anywhere near its previous levels since the devastation caused by the mortgage market collapse. While there continues to be some activity in the jumbo market, the remainder of the conventional secondary market is almost exclusively limited to selling loans to Fannie Mae and Freddie Mac. While there are many other factors including regulatory issues and the ability to validate quality levels demanded by investors, many of the sessions and most of the networking involved how the industry could expedite the re-emergence of those investors whose appetite for mortgage loans fueled the robust market of the 2000’s.

It was therefore ironic that one of the lead stories in the New York Times on Tuesday, May 19th was entitled “Wall St. Puts Crisis Behind and Prospers”. The article discusses the fact that the Wall Street financial sector markets have fully recovered from the impact of the crisis much faster than other segments of the financial services industry and most likely faster than anyone suspected they would. Yet the article was not all good as studies concerning the size and position of the financial markets in relationship to the overall economy were not altogether supportive of the robustness that mortgage lenders are seeking.

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Of particular interest are the concerns expressed about the size of the financial sector and whether or not this quick recovery is actually a good thing. The International Monetary Fund recently released a study that concluded that the existence of large financial sectors “may actually crimp economic growth and living standards for most people.” Furthermore since financial sectors can create debt instruments which allow consumers to take on more debt leading to more frequent boom and bust cycles this rapid recovery may lead to more of the underlying issues that caused the crisis in the first place.

In addition to this, studies at the Brandeis International Business School have found that there is a relationship between the size of a country’s financial sector and the growth of productivity and determined that the larger the financial sector the smaller and weaker the growth in other sectors.

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If in fact these concerns are valid, the issues we face are not that there are few private securitizations taking place, but how will this recovery and growth impact our business. Despite the emergence of the jumbo market as a larger percentage of overall originations, the fact remains that the majority of mortgage lending is done by those other than the mega-rich. If large financial sectors detract from the overall economic growth, what does that mean to those individuals who are looking to either get into the housing market or move up to a larger home? How will this impact new housing starts and will first time-homebuyers now hesitate to make the leap to homeownership? And most important, is it time for the industry and housing policy makers to look for other options for selling and securitizing mortgage loans? The risks of losing such a critical option as Wall Street are significant and need to be addressed sooner rather than later.

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