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39 » VISIT US ONLINE @ DSNEWS.COM WELLS FARGO WELCOMES BACK PRIVATE-LABEL RMBS Wells Fargo is looking to bring back the private-label bond this year—something the bank hasn't done since 2008 at the tail end of the housing crisis. Franklin Codel, Head of Consumer Lending at Wells Fargo, said as much in May in an investor's presentation. "is year, one of our aspirations is to come back to the market with a couple of deals, and we're taking a look at making sure we can structure those properly ... to try to test the market and see what we can do there to help bring confidence back," Codel said. "ere's been many, many years since Wells Fargo has participated in any kind of private-label market." So-called private-label bonds are backed by nongovernment guaranteed mortgages. ey typically afford lower interest rates to borrowers, as they allow a bank or financial institution to offload the risk to an investor instead of keeping it all in house. Both JPMorgan Chase and Redwood Trust have started securitizing private-label bonds in the last few years. In 2005 and 2006, about $1 trillion in mortgages were securitized this way every year, but after a huge amount of them defaulted, the private-label market hasn't been the same since. Less than $60 billion in these bonds have been created since 2009. In fact, Wells Fargo is still answering for its poorly backed residential mortgage-backed securities (RMBS) from the crisis era. In March, a federal judge allowed several claims against the bank to move forward. Filed by several investor funds, the claims alleged the bank owes billions of dollars in losses on RMBS. Just a few of the investors include Royal Park Investments, Blackrock Allocation Target Shares, and Phoenix Light SF Limited. Standard & Poor's predicts the private market to hit $50 billion for the year, up from the $35 billion it originally predicted. e jumbo prime RMBS market hit $2.6 billion in transactions in the first quarter of this year alone. MORTGAGE DEFAULT RISK IS ON THE RISE On May 4, VantageScore Solutions, LLC, and TransUnion released the VantageScore Default Risk Index (DRI) for Q 4 2016. According to the DRI, when it comes to default risk, mortgages pose a lower threat than auto loans, student loans, and bankcards, with the DRI for these four categories coming in at 85.4 (mortgage), 89.3 (auto), 90.0 (student loans), and 96.8 (bankcards). Despite the lower default risk compared to other debt categories, mortgage risk is up quarter over quarter. e DRI uses credit file data to measure the relative changes in risk level assumed by lenders, benchmarked against Q 3 2013 (when the index was first created). e DRI also measures quarter-over-quarter change and year-over-year change. Quarter over quarter, mortgages saw a rise in default risk of 3.6 percent. "New card and auto loans showed marginally more conservative risk profiles than the previous quarter, while mortgage loans showed the opposite trend," the companies stated. "Student loans were once again the outlier, where the seasonal pattern continued to bring low volumes and higher risk loans in the fourth quarter when compared to the fourth quarters of years past." e risk of default in student loans, and the burden this type of debt has on Americans, impacts the housing market in a variety of ways. Recognizing that student loan debt is one of the top barriers to homeownership, Fannie Mae recently released series of policies to help borrowers with student loan debt buy homes, regardless of their loan balances. "We understand the significant role that a monthly student loan payment plays in a potential homebuyer's consideration to take on a mortgage, and we want to be a part of the solution," said Jonathan Lawless, VP of Customer Solutions at Fannie Mae. "ese new policies provide three flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers." BLAME IT ON REFIS e American homeowner's penchant for "using homes as ATMs" in cash-out refinances likely played a big role in sparking the housing crisis about a decade ago, according to a blog posted in May by Laurie Goodman, Co-director of the Urban Institute's Housing Finance Policy Center. In her post, titled "Using Homes as ATMs, Not Homebuying Fervor, Was More to Blame for the Housing Crisis," Goodman examines the difference between government-sponsored entertprise (GSE) purchase and refinance loan performance data between 2005 and 2008. "Many argue that government policies aimed at increasing first-time homebuyers caused the housing crisis," Goodman wrote. "is narrative persists despite considerable evidence to the contrary. Our Housing Credit Availability Index suggests the presence of risky products— not increased lending to riskier borrowers—was a significant contributor to the crisis. New data from the government-sponsored enterprises now suggest a further culprit: mortgage refinance activity." According to Goodman's analysis, 84 percent of refinances during this period were cash-out loans, and they saw sloppy underwriting and higher rates of defaults than purchase loans of the time. "At the height of the boom, mortgage refinances were more likely to default than mortgages taken out to purchase a home, mostly because many people were treating their homes as ATMs through cash-out refinances," she wrote. Looking at data on GSE loans from 1999 to 2015, 4.48 percent of refinances went more than 180 days delinquent. In 2007, during the crisis, 15.78 percent—or nearly four times more—reached 180 days or more. Only 9 percent of purchase loans were delinquent as long. "Conventional wisdom suggests that refis should be less risky than purchase loans and default less because the borrowers have a known history of payment," Goodman wrote. "So these results are surprising, especially given the stronger credit characteristics of refis, such as lower loan- to-value and debt-to-income ratios." According to Goodman, "ere is a lot of blame to go around for the poor quality of loans before the housing crisis," but ultimately, she says the data shows purchase borrowers don't bear the brunt of it.

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