MISMO Fall Summit: Building Confidence and Efficiency into Non-Agency Data Exchanges

Panelists at MISMO Summit discussion on private-label securities, (l-r) Vanessa Purwin, Ramon Gomez, Kristi Leo, Julia Curran and Dan Fichtler.

CRYSTAL CITY, VA.–An efficient private-label securities market requires that investors have confidence in their understanding of asset quality for their deals. But questions remain, according to panelists here at the MISMO Fall Summit–and ongoing work under the auspices of MISMO is poised to help provide much-needed data standardization.

“We think about what the PLS market could be–the full potential of a sustainable PLS market,” said Dan Fichtler, Associate Vice President of Housing Finance Policy with the Mortgage Bankers Association. “Who could we be serving in a responsible manner who isn’t being served well today? What is needed, to move from the current state to more efficient non-agency deals? Can we provide trust in ways that makes PLS more competitive? Are there lessons to be learned from the agency [Fannie Mae/Freddie Mac/Ginnie Mae] model?”

Vanessa Purwin, Senior Director with S&P Global Ratings, said she is seeing greater enthusiasm for the private-label securities market and attempts to revive the market in a responsible manner. “PLS is currently a small fraction of the market–just 3 percent,” she said. “But it’s 3 percent of a $12 trillion market, so it’s still a lot.”

Kristi Leo, President of the Structured Finance Association, said the coronavirus and the emergence of the “gig” economy is creating new opportunities for private securitization.

“You have a lot of self-employed folks, or freelancers, or consultants who are no longer employees with a W-2. This is a space where we need to finance; folks who want to finance homes as well,” Leo said. “ So, this market provides an avenue beyond balance sheet for the bank and another way to finance those loans. What we’re seeing today is just a fraction of what the market used to be; we need to keep this market healthy and fresh.”

Ramon Gomez, Managing Director with JPMorgan Chase, also sees the market’s potential. “Right now, we know people who make money and don’t fit the traditional profile,” he said. “They are not the old Alt-A; they are not the old subprime. They have, for the most part, banks; but they have thin credit files or no credit files. And there’s a group of these individuals who now can be underwritten using very sophisticated methods. There’s going to be a spectrum of them; some who are well-qualified and some who are not.”

Gomez said the PLS market also faces potential alternative competition. “Many of them are creditworthy, and it’s not just the private-label market that’s trying to serve them,” he said. “Now we’re starting to see a group of [Environmental, Social and Governance] ESG investors that are also looking for some form of taxonomy to serve this market. And they’re willing to enter and invest–if they can have assurances about the data and who they’re investing in.”

And therein lies part of the problem. Panelists cautioned that the PLS market is hampered by a number of inefficiencies.

“One of the things that the agency market has done in the past 10 years, which has been phenomenal, is create consistency and standardization that has made the GSE market function very smoothly and has eliminated inefficiencies and get that cost that you can relay to the borrower down,” Leo said. “That’s one of the things we really need to see happen within the PLS market–we’ve had some fits and starts with that, but we really need to see that on a bigger volume and to make it competitive.”

Leo said creating greater efficiencies starts with collecting and providing better data. “If you think about a loan that is being originated in somebody’s office–pulling together all of the income and all the things you need to make that decision–it’s really far away from the investor on the other end, who is buying,” Leo said. “They really have no idea about those discussions and what was considered and verified. So, how do we get that information down to investors who are making these decisions to buy bonds, 60 or 180 days later? They need data and analysis.”

The problem, said Julia Curran, Senior Director with SitusAMC, is while there is plenty of data, it’s not well-organized, which creates inefficiencies.

“The agency market is very well developed and they have the URLA [Uniform Residential Loan Application], of which you are all familiar–it’s an integral part of MISMO,” Curran said. “In the private-label market, there is no such thing…so, the first problem in the differences with the GSEs and the private-label market is that there isn’t that consistency of definition, that consistency in the data.

And while the GSEs have fairly consistent guidelines, Curran said, in the private sector guidelines are “all over the place.”

“Having a way to get to the documentation behind these, or at least aggregate up all of those document points, and make it so that we apply a level or a code or something to it in a data format I think will really help the market, because we’re then going to make it where a one-month bank statement we can call a no-doc, and a two-year tax return we can call a full doc, and then there’s 57 other things,” Curran said. “But we have to be able to get to data points that the marketplace can begin to analyze, because the private-label market is just so much broader.”

Purwin said over the past 10 years, the situation has not improved. “I think in some ways it’s gotten worse; we haven’t been able to keep up with the changes,” she said. “In 2013 when the market was pretty quiet and the pace was a lot slower, we had a better handle. Now, where issuance is picking up back to the 2006-2007 days–and the data is a bit messier. I think we’re probably a bit behind the curve. I can take out a mortgage from an app on my phone, but then when it goes to the rating agencies or to the investors to see what exactly you look at to make that mortgage, there are a lot of question marks and a lot of back and forth. So, on the data side, the technology hasn’t kept up with the regulatory changes and a lot of the product changes on the origination front-end.”

This has built a lack of trust, Gomez said. “The inefficiencies in the system stem from a lack of a common language,” he said. “We don’t have something like a genome for mortgage that we can see across issuers and products and see what the differences are in a standardized way. We could do that with standardized data across the system. I think the trust factor would increase and we would be talking about the challenges of diversification and things like that, but still, we don’t have the common data set.”

A second challenge, Gomez noted, “is that there is an asymmetry about who can overcome that trust. If you have an army of sophisticated bankers, you can overcome that trust. But that’s no way to extract efficiencies from the market and be able to bring the cost of credit more broadly.”

Curran served as co-chair of the MISMO Private Label Securitization Development Workgroup, which spent three years developing a dataset that is now in review stage. Implementation of the dataset, she said, would be “huge.”

“A MISMO dataset that can be used throughout the market would be wonderful,” Curran said. “All the definitions would be the same; everyone would have the same understanding; you could sample because you would have what is in the database.”

But Curran conceded that, without the ability to engage in sampling, the growing volume presents challenges. “Right now, we don’t have the capacity to do it–we cannot hire enough underwriters to do it,” she said. “So, if we could move to sampling, where we could give the ratings agencies some comfort that the loans we didn’t look at, we could at least give them all the datapoints. Right now, we can’t even give them all the datapoints unless we look at it. So, to be able to move to sampling we have to be able to move to a dataset that people can use, and that would speed things up, and that’s where I would love to see the market go.”

Purwin agreed. “If we have questions about the data given the results of the sampling on the unsampled loans, we make conservative assumptions when information is missing or there is some uncertainty in terms of execution and loss coverage levels or performance. We’d rather be more accurate or build in less cushion for these potential data issues if we had a standardized dataset in which we were fully confident.”

Gomez said efforts to standardize data in the PLS market hold tremendous potential to “move the needle” in terms of growing issuance.

“We believe it can revive the market significantly and can also make it significantly more efficient, because it’s a muscle,” Gomez said. “And once we get to the point of having standardized data and using it and creating comfort in the market, we can accelerate its use and its adoption…the pie can get bigger; the costs can come down. Sampling could be what we talk about and not the exception. And most importantly, I think that we can think about the market in a different way, which is something we spent a lot of time talking about last year. Because when we’re facing a lot of unknowns, so much of it was the lack of understanding and the lack of data, and what could happen.”

“What this market should be able to do is pick up and be able to do it efficiently; the fact that we’re having to put cost in there, that’s crazy to me,” Leo said. “We’re sitting here in 2021 and we still can’t get the data to the other end, much less use it to make good credit decisions. Investors tell me all the time, it’s a struggle, because they don’t even have the information. When you can’t get the data, they assume the worse. That’s what they have to do. And we’ve been lucky because the market for high-yielding assets, there’s very few of them out there, that’s been to our benefit. So, what they are charging today is probably less than what they charge for a different market, and this market could shut down if that information is not available. It’s not moving quickly, so we need that to happen, so that when we go through a rough spot, investors can make the necessary decisions in the secondary market.”