Private U.S. Mortgage Market Rises From the Dead
NEW YORK (TheStreet) -- The U.S. housing market relies almost entirely on government support, but distant glimmers of a private-sector alternative are growing brighter.
You may not realize it, but if you have received a home loan since late 2008, it is very likely that the only reason you were able to do so is because the government was prepared to guarantee it via Fannie Mae(FNMA) , Freddie Mac(FMCC) , Ginnie Mae or insurance from the Federal Housing Authority.
Government loans (better known as "conforming" loans) accounted for somewhere between 84% and 90% of total mortgage debt extended since the start of 2009, according to data from Inside Mortgage Finance and Royal Bank of Scotland. That compares to 60% to 65% in the pre-housing bubble days of 1994 to 2002, and just 36% when the mortgage market peaked in 2006.
A big reason for the disappearance of the private mortgage market has been the shutdown of the market for private mortgage backed securities (MBS) -- bonds created from groups of mortgages.
There used to be a thriving private market for MBS. It exceeded $700 billion in 2005 and 2006, according to the Financial Times. It essentially disappeared following the 2008-2009 subprime crisis, however. Total issuance in 2010 and 2011 combined totaled just $1 billion, according to Bloomberg News.
Since the crisis, bond investors haven't been willing to buy MBS that don't have a government guarantee. And the government guarantee is critical, notes Jeana Curro, director of Agency MBS Strategy at Royal Bank of Scotland.
"Whoever is buying this bond -- whether it's a hedge fund or an insurance company or a pension fund or a bank portfolio -- they're not taking the credit of the individual homeowners," she said. "They're taking the credit of the U.S. government. So by doing that, it really broadens the investor base. Our product is probably one of the more actively traded ones. If you look at the credit universe, there's a much smaller number of investors who play in there."