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Experts see little future for residential mortgage-backed securities issued by banks

<i>Prime culprit in financial meltdown exits</i><br>

Wall Street may seem like a war zone these days as banks collapse, firms bleed jobs and the federal government stands ready to call in the cavalry. It’s unclear who will weather the storm at the end of the day, but it is increasingly clear that the credit crisis has claimed one casualty: residential mortgage-backed securities.

The RMBS market — sometimes blamed for starting the whole mess in the first place — appears to be, at least, badly wounded.

These structured securities, which are bundles of thousands of home mortgages issued by investment banks and government mortgage backers, comprised about 65 percent of approximately $10 trillion in outstanding U.S. mortgage debt in 2007, according to Tomasz Piskorski, a Columbia Business School professor who specializes in real estate.

But what was once a massive infusion into financial markets has slowed to a trickle: July saw the least amount of RMBS issuance since January 2007. In July, private banks issued only $743 million in RMBS — a huge dropoff from $10.1 billion in June, and a fraction of the $105 billion in RMBS issued in March 2007, according to data compiled by Inside Mortgage Finance, a weekly publication.

In fact, this year is on track to be the slowest year for RMBS issuance since 2000.

Government-backed mortgage giants are increasingly the market’s most active players. Freddie Mac and Fannie Mae saw 1 percent and 13 percent rises, respectively, in their RMBS issuance in the first seven months of 2008, compared to January through July 2007.

A similar agency, Ginnie Mae, an entity that allows mortgage lenders to obtain a better price for their mortgage loans on secondary markets, saw a 190 percent increase in that time.

Private banks, meanwhile, have seen staggering declines in issuance. Non-agency RMBS issuance fell 91 percent in the first seven months of this year compared to the first seven months of last year, according to the Inside Mortgage Finance data.

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In the second quarter of 2008, non-agency RMBS issuers included Wachovia, Bank of America, Countrywide and Lehman Brothers, according to Guy Cecala, the publisher of Inside Mortgage Finance. But few of these securities involved newly originated mortgages, he added. Most are seasoned loans from bank portfolios or re-
securitizations of previously issued RMBS, he said.

“There are no investors in the world who want a non-agency- or non-U.S.-government-backed security,” Cecala said.

Indeed, the RMBS and asset-backed securities markets look grim. In late July, Merrill Lynch announced it agreed to sell $30.6 billion of securitized debt to an affiliate of Lone Star Funds for only $6.7 billion — a mere 22 cents on the dollar.

“The private-label RMBS business is for the foreseeable future … it’s on its ass. It’s not going anywhere,” said Lawrence Longua, director and clinical associate professor at the REIT Center at New York University’s Schack Institute of Real Estate.

Piskorski, the Columbia professor, predicted there wouldn’t be much of a market for securitized mortgages “at least for a year or two.” And then, he predicted, the banks will have to keep some of the riskiest parts of the loans on their balance sheets.

As the market for mortgage-backed securities has come under attack, so have the merits of securitization itself.

Ethan Penner, principal with Lubert-Adler, a real estate private equity firm with offices around the country, defended securitization in an article in the Wharton Real Estate Review. The securitization model, compared to the “bank deposit/portfolio lending model,” falls short because it increases the cost of capital, offers less transparency and reduces democratic access to capital, Penner argued.

“Securitization is experiencing its first real test. Clearly there will be adjustments,” Penner noted. “Yet there will surely continue to be a significant role for securitization. This is a time for thoughtful regulatory oversight, not the time to throw the baby out with the bathwater.”

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