Wednesday, February 22, 2012

RMBS data warehouse needed if private investors are to replace Fannie and Freddie

Four years after the beginning of the financial crisis, the US government is finally taking the first steps towards addressing the issue of opaque residential mortgage backed securities.

Specifically, as discussed in a Bloomberg article, the Federal Housing Finance Agency (FHFA) has realized that an RMBS data warehouse must be constructed if investors are going to end their buyers' strike.

It is impossible to shrink Fannie Mae and Freddie Mac without these investors.

The only way that these investors are going to be willing to end their buyers' strike is if they are provided with all the useful, relevant information on the underlying collateral performance in an appropriate, timely manner.

For RMBS deals, this information is observable event based disclosure where an observable event with the underlying collateral that causes the information to market participants to be updated includes, but is not limited to, a payment, delinquency, default or bankruptcy.

It is only with observable event based disclosure that market participants have current information on the assets backing the security.

Without this information, market participants are left with the disclosure practices that exist for opaque, toxic mortgage backed securities.  We know how that turned out.

With no plan from Congress or the Obama administration to shutter Fannie Mae and Freddie Mac, the companies’ regulator told Congress today it will expand its oversight with a strategic plan to develop new systems and standards for home loans. 
The companies, which own or guarantee most of the nation’s mortgages, exist in an extended policy limbo that poses new risks to taxpayers and the housing market, said Edward J. DeMarco, acting director of the Federal Housing Finance Agency
The mandate to protect taxpayers must be balanced with the need to invest in staff and infrastructure, he said. 
“Conservatorship can’t go on forever,” DeMarco said today in a telephone interview. “If we want to have a secondary mortgage market in the future without Fannie and Freddie we have to start investing.” 
The companies are “complex financial institutions with complex business processes, information technology structures and important human capital,” he said.

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