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58 | Th e M Rep o RT O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET the latest Michael Stegman treasury Official chimes in on Housing reform public trust is the key, says Treasury's Michael Stegman. a mid calls from the Obama administration for a more stable hous- ing market—particu- larly where affordable housing is concerned—Michael Stegman, counselor to the Secretary of the Treasury for Housing Finance Policy, called for top-down reforms that would rewire how the federal government funds and regulates both government and private-label securities. Stegman said the GSE system needs a drastic overhaul in order to better operate, fund, and regulate itself and private-label securities (PLS), operations. He criticized a pair of "implausible scenarios" that would either leave the GSE system to amend itself or rely on minor revisions. Neither of these approaches, he said, would achieve what the president is calling for—a mortgage market dominated by private capital backed by secure government, and one that broad- ens the transparency and access borrowers and investors have to the mortgage process. President Obama's overarching vision is to have the secondary market, which is dominated by Fannie Mae and Freddie Mac, fund the primary market and provide greater maneuverability in the affordable housing sphere. Borrowers, though willing to risk mortgages, Stegman said, mistrust the system that upended in September of 2008 and is still reeling from the economic haymaker wrought by the Great Recession. To re-establish trust, Stegman said, U.S. housing needs a stron- ger, single-source federal mortgage insurance system. To achieve this, the existing dual-source GSEs must confront the fact that the system has been undercapitalized, overextended, and overcompli- cated. Add to that the fact that implied government security for loans have not really provided lower mortgage costs for even good-risk borrowers, and trust is out the window, he said. First, Stegman said, the GSE system needs to be restructured to withstand the bubble-and-bust trends that plague the housing market. This is an important step, considering mortgage hold- ers owe Fannie and Freddie around $5.6 trillion, which is half the U.S. budget. Second, Stegman said, the improved liquidity and removal of credit risk afforded by a single security would reduce spreads, thereby lowering relative post- reform mortgage costs. Third, creating a single-source governmental insurance entity would improve efficiency and oversight and reduce operating expenses through greater standardization. The underlying issue for Stegman is the public trust. Borrowers, he said, must feel their creditors are accountable and responsible. Anything short of a government that standardizes and enforces its regulations as a way to buttress the housing market against traditionally destabilizing forces simply will not work. analysts revise Forecasts on Weak mBs issuance early numbers suggest a softer year than originally thought. I ssuance of mortgage-backed securities (MBS) remained weak through the year's early months, pushing some analysts to rethink earlier originations forecasts. Citing weak MBS issuance data published by Inside Mortgage Finance—$67.3 billion in January, followed by $64.5 billion in February—researchers for invest- ment bank FBR Capital Markets anticipate a weak first quarter, with issuances likely totaling near $200 billion. While noting issuances are not the same as origination figures, FBR nevertheless dialed back its first-quarter origination projections to $244 billion, bringing its full-year forecast to $1.2 trillion from $1.3 trillion previously. "Though we had long expected refinancing volumes to slow as rates rose and the pool of borrow- ers with an economic incentive to refinance declined, we have been counting on a rebound in the purchase market that has yet to occur," the FBR team noted in its latest report. While there are several factors that can explain the slow comeback in purchase lending, they go on to say that the two biggest influences will correct themselves over time: higher interest rates and a lack of credit availability. At this point, the question is how long it will take for purchase loans to make their much- anticipated recovery. "Though our 2014 expectations have moderated to around $1.2 tril- lion from an original $1.5 trillion es- timate, we continue to believe there is upside to both our estimates and the MBA's [Mortgage Bankers Association's] $1.1 trillion forecast," FBR said. "This should especially be true if refinancing volumes stabilize and purchase volumes begin to increase." "Given a lack of purchase strength in the last several months, the next six to nine months will be a critical driver of mortgage company performance in the coming year."