So Many Bees, So Little Honey

[u]BLOG VIEW[/u][/i]: The last time I was in New York was on the afternoon of May 1, which was the day of the failed bombing attempt in Times Square.[/b] As luck would have it, I was in Times Square for most of that day, but I left the neighborhood roughly a half-hour before the commotion occurred. I am back in New York today for the Mortgage Bankers Association's Secondary Market Conference, and I suspect there won't be any ticking bombs planted at the event site. However, there are a number of metaphorical ticking bombs lurking within the industry that we need to address. The biggest dilemma is the question of reforming the government-sponsored enterprises (GSEs), which the Obama administration does not want to address until 2011. Meanwhile, Fannie Mae and Freddie Mac continue to soak up billions of dollars without showing any evidence that they are able to function as profitable entities. Besides Fannie and Freddie, there is another problematic GSE that normally avoids our attention: Farmer Mac, which focuses on the agricultural mortgage market. But attention needs to be paid to Farmer Mac, because during the first quarter of this year, it reported a profit of $9.5 million, down from $37.5 million a year earlier – a 75% drop. There is also the question of the financial regulatory reform legislation that is being hammered out in Washington. That endeavor appears to be coming to an end, yet a sour residue remains. The legislation's supporters have tried to spin this effort as a Wall Street-versus-Main Street battle, ignoring that the institutions that will be hurt the most by this legislation can be found on Main Street – the nation's community banks and credit unions, which played no role in the creation of the economic crisis but are, nonetheless, being punished along with the larger institutions that were responsible for the economic crisis. And speaking of banks, the number of bank failures continues to pile up. As of May 17, 72 banks were shut down this year. Not unlike that leaking oil rig in the Gulf of Mexico, the bank failure crisis is a catastrophe that was allowed to rush out of control. There is also evidence that the levels of strategic defaults are on the rise. Research by the Chicago Booth/Kellogg School Financial Trust Index determined that the percentage of foreclosures perceived to be strategic defaults was 31% in March, compared with 22% in March 2009. I believe that this data confirms that the federal loan modification push is not working. It may seem that the federal government is behaving like a warped beehive, full of buzz and commotion but absent of honey. The real honey in the industry, not surprisingly, is far removed from the federal government: Last month, Redwood Trust chipped away at the frozen private-label market with a $238 million prime jumbo residential mortgage loan securitization sponsored by its wholly owned subsidiary, RWT Holdings Inc. This was the first private-label security offering backed by newly originated mortgages since 2008. The big challenge, however, is determining what the industry can do to encourage more private-label activity. Quite frankly, I've seen very little encouragement from the federal government toward the resurrection of a self-reliant private-label market. Most tellingly, Congress conspicuously avoided the approval of a regulatory framework for a new covered-bond market, and the administration is indifferent to such a concept. While I doubt that any of these issues will be solved during the Secondary Market Conference, I hope there is a frank acknowledgment that the situation is not improving. Ignoring problems will not make them go away, and there are too many concerns that the industry needs to confront now. – Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b] [i] (Please address all comments regarding this opinion column to


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