Wes Miller is the CEO and co-founder of ATS Secured, which
has been termed a “new technology category” for the real
estate and settlement industry. He has extensive experience
in developing and marketing both core and ancillary financial products. Reach him at firstname.lastname@example.org.
Trends Signal a Potential
Liquidity Crisis Ahead
Addressing the lack of private-investor participation in
the secondary market is key to avoiding a tipping point
By Wes Miller
Author Malcolm Gladwell’s famous book “The Tipping Point” illustrates how even small events or details can have major consequences by essentially actingas the
straw that breaks the camel's back.
Among the agents and theories of change outlined in "The Tipping Point" are The Stickiness Factor,
The Law of the Few, The Power of Context and Broken
Windows Theory. Each can apply to every aspect
of life, including the use of social media, grocery-shopping habits and even economic trends — such as
the housing market.
Pretend it’s 2008. What comes to mind? Layoffs? Hard
times? Fraud? Recession?
For a topic or event to be deemed sticky, it has to
be intriguing or memorable. That's what makes it grab
and hold the public's attention. In other words, it has
to stand out in some way for it to stick in the public
The 2008 housing crisis became a memorable, or
“sticky,” event, as is demonstrated by the making of the
movie "The Big Short" — a film set against the world of
high finance and the collapse of the housing bubble.
If Hollywood takes notice of an event, it’s betting the
American public will remember that event.
Hollywood was betting that the housing crisis was
“sticky” in moviegoers’ eyes. That bet paid off with
an Oscar nod for best adapted screenplay and a tidy
worldwide box-office gross of more than $130 million.
That's not bad for a movie about complicated financial concepts.
The housing crisis is a sticky subject, all right. That
means people remember the crisis. Does that mean
another one’s coming? Actually, it might — especially
because a certain group of people still remember it
all too well.
In a scene from "The Big Short," actor Ryan Gosling
uses the block-stacking game Jenga to represent the
failed mortgage bonds making up the U.S. housing
market. The collapse of that market — of the Jenga-like tower of bonds — hurt a lot of people, crushing
private mortgage investors in particular.
Groups of people that contribute to an event’s tip-
ping point don’t have to be large. What matters is who
they are, what they know and what they do with the
information. Gladwell identifies these key influencers
people as “mavens.” Private mortgage investors
represent the mavens of the housing crisis because
it hit them the hardest. Ever since the 2008 housing-
market collapse, they have studied the loans they take
on with jaded, practiced eyes. They will do anything to
avoid another housing meltdown.
In fact, because of investor hesitancy, most of the
mortgages sold on the secondary market today are
purchased by the government-sponsored enterprises
(GSEs) Fannie Mae and Freddie Mac, and not by private
Context matters, or as Gladwell explains, tipping-point
events are affected by the times and places in which
they play out. In the case of the housing market today,
the context signals caution ahead.
In 2018, per prior Congressional action, the GSEs are
set to wind down their investment portfolio business
to a minimal level, essentially making it impossible for
them to rebuild capital. This is not to say necessarily
that the GSEs will be gone after 2018, but they are now
operating under a conservatorship that was meant
as a temporary solution. At some point, perhaps by
2020, the GSEs will, at the very least, be reformed —
but how that reform will look, or whether it will work,
Today, there is a dearth of private-investor participation in the residential mortgage-backed securities
(RMBS) market, which is a major source of liquidity in
today's housing market. The RMBS market works by
allowing lenders to sell home mortgages they originate into the secondary market, where securities are
issued against those loan pools, assuring lenders and
investors, including the GSEs, have a steady and fluid
source of new capital.
Lenders now sell the bulk of their loans to the GSEs.
That’s a heavy load. If the GSEs' role is downsized —
or eliminated — as part of any future reform, that
could have a profound impact on the liquidity of the
In 2006, private investors (or non-agency players)
accounted for 56 percent of new RMBS issuance. By
2007, when private investors saw the writing on the
wall with respect to the housing bubble, non-agency
issuance had dropped to 38 percent. Today, non-agency RMBS issuance stands at about 5 percent
of the total market. Above all other issues, the 2008
mortgage crisis was arguably about liquidity — or the
lack of it.
The implementation of the new Truth in Lending Act
and Real Estate Settlement Disclosures Act Integrated
Disclosure (TRID) rules this past October has raised the
stakes even higher. TRID requires lenders to adhere
to strict consumer-disclosure guidelines that revolve
around a set of standardized forms provided to
borrowers. Errors or other problems related to those
disclosures and forms can delay loan funding and even
create potential legal liabilities for the owners of those
loans, such as private investors who purchase them
with the goal of securitizing the mortgages.
Consequently, TRID errors are creating some hiccups
in the packaging of home loans for the secondary
market. If private investors were already shunning the
RMBS market to a large degree before TRID, how can
they be convinced to come back to the market now
that the new regulations are in play?
There needs to be a paradigm shift soon, or the
housing market could face a new liquidity crisis in the
near future, which may fuel yet another housing-market collapse.
In the 1990s, the New York Police Department started
cleaning up signs of gang violence in neighborhoods.
The theory was that by repairing and reducing these
small indicators of crime, it helped to ward off other
criminal activity. The converse was deemed true as
well — that small signs of crime, such as broken windows, could encourage more serious criminal activity.
TRID violations are similar to broken windows in the
eyes of private investors. Many industry experts see
these errors as minor typos or oversights; however,
in sufficient volume and not adequately addressed,
these errors can lead to much bigger problems.
Among the market concerns is that these TRID errors
could be deemed contractual violations of the loan
origination agreements, and that risk extends to any
investor purchasing those home loans, including
Add in the other regulatory changes put in place
since the financial crisis, such as the Dodd-Frank Wall
Street Reform and Consumer Protection Act, and you
have a cocktail for a potential crisis. If borrowers go into
default, and their attorneys discover TRID violations,
there are additional delays and costs associated with
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