They say they can't stomach the default risk, but what's the alternative?
Nobody wants to see taxpayers responsible for another $150 billion bailout of the mortgage market. That was the consequence for the government implicitly backing the mortgage finance companies Fannie Mae and Freddie Mac. Unfortunately, a quick, clean exit strategy for the government doesn't exist: when the crisis hit, the private credit market rejected mortgage risk. So the government stepped in to fill the gap, backing nearly every new mortgage. Now, investors are saying that their appetite for mortgages may never return. Do they really mean it?
In a House subcommittee hearing on Thursday, investors said that foreign investors would not provide capital to fund U.S. mortgages unless the government backing was in place. But that's not all: many domestic investors would shun mortgages as well. Here's Jon Prior at Housing Wire reporting:
Michael Farrell, CEO of the real estate investment trust Annaly Capital Management, which has been investing heavily in agency MBS since the crisis, told the House subcommittee Thursday the private market would unable to fill the gap should the government-sponsored enterprises are removed.
"Many, if not most, investors in agency MBS won't invest in private-label MBS at any price or only in reduced amounts because of their need for liquidity or the restrictions of their investment guidelines," Farrell said.
He cited Credit Suisse analysts, who recently estimated the U.S. housing market would lose between $3 trillion and $4 trillion in funding both domestically and globally if agency MBS was replaced by products such as Alt-A mortgages or other credit sensitive instruments.
The problem is that these investors want ultra-high quality debt, and they presumably would worry that mortgage default risk would taint mortgage-backed securities. They don't have to look back far to make their point: mortgage securities nearly brought down the global financial system in 2008 because they became toxic when home prices started plummeting.