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» by providing transparent baselines against which all market activities can be openly measured. In any event, an upswing in the secondary market notwithstanding, there aren't many deals on the private-label side, Katopis says. "One sentiment is that mortgage investors are on strike because they just can't invest in the current climate." That's particularly true because the U.S. government sends the market some troubling signals that require reevaluation, he says. "Investors need to be convinced it's a sound investment and government won't create risk." Freud doesn't see private capital entering the new origination space anytime soon. "All the entities that would consider getting into private capital and the housing market, like Ranieri Partners and PIMCO, won't in the next three to five years. No chance," he said. Foreign Investors Seek Value Meanwhile, Katopis says foreign investors appear to be taking a wait and see attitude in restoring private equity to the U.S. housing market. "Foreign investors are intelligent; they're looking at things the same way all other private investors are," Katopis said. "If you're investing in something the government can nationalize or make risky, pass. Go on to the next thing. That's why there's not been a significant RMBS securitization in the last three or four years. People are risk adverse." On the other hand, Freud says his group regularly meets with a number of investors from foreign lands, including Chile, China, and Japan. However, while some of the larger banks from these countries "definitely are putting their feelers out, I just don't know if they'll ever get comfortable enough" to sink their capital into U.S. housing, Freud said. "Maybe they're smarter than we are and just aren't ready to come into the market yet." However, Freud says they might be particularly reluctant because they're unsure how to build the necessary infrastructure. D'Vari says foreign investors typically rely on the big funds to time their entry into the market. "Given the inflow of capital to these larger funds, you would naturally see allocation to the residential sector," he explained. Capital is coming from both U.S. and foreign investors, such as Canada, the Middle East, and Asia, where they're trying to diversify from energy, D'Vari says. Meanwhile, Freud notes there's been great interest in mortgage-backed securities comprised of so-called "scratch and dent" mortgages, meaning higher risk loans that fail to meet the lender's underwriting criteria. VISIT US ONLINE @ DSNEWS.COM "Without a doubt, the scratch and dents are huge," Freud says. "I've talked to Wells Fargo and Bank of America, and they're just holding their scratch and dents on their books. [It's] such a great loss [that] you're not seeing those trading," Freud said, acknowledging the lack of a marketplace for such deals. "The smaller mortgage bankers don't have the warehouse lines anymore. The scratch and dent is kind of our space, and I think they're lumped with nonperforming and re-performing," priced at points where they can't be sold, he explained. D'Vari says institutional investors are generally targeting larger markets with diverse economic and population growth while smaller investors remain patient in markets such as Arizona and Nevada, where there's a huge supply of existing and shadow home inventories still tucked away from the market. Foreign investors are seeking value with governments trying to ascertain ways of targeting investments in certain regions of the United States, according to Katopis. Ultimately, though, he says private capital is not the solution. "There's, no sugar daddy," Katopis said. "People think, 'oh, the Chinese will save us,' but no. If our government has stupid policies, no one's going to invest here." INDUSTRY INSIDER Q&A Tom Deutsch, executive director of the American Securitization Forum (ASF), gives his take on private capital's return to the secondary mortgage market. DS: Are investors interested in pumping capital into housing now that it appears the dust has settled from the crash? Deutsch: It's not clear what investors' appetite for investing in RMBS [residential mortgage-backed securities] is at this stage. Some still have a view that home prices have some ways to fall yet, especially in judicial states like New York that have three-year lags in foreclosures. Moreover, local government initiatives like the proposed seizures of mortgage loans by San Bernardino County continue to scare some investors off from populist takings of investments. DS: What types of deals are currently taking place on the private-label side? Deutsch: Most deals that have been done post crises are extremely high-quality loans and are super jumbo. Until the loan limits come down for the GSEs and FHA, the private markets are likely to be relegated to this thin sliver of securitization for some time. DS: How big a role does foreign investor activity and interest play in restoring private equity to the U.S. housing market? Deutsch: We can't underestimate the importance of foreign investment in the U.S. housing market. Certainly large U.S. institutional investors play a big role, but getting more foreign investors to return to purchasing U.S. private-label would be greatly beneficial. DS: What effect is the scene in Washington having on the secondary market's private capital revival? Deutsch: When both sides of the political aisle are singing from the same hymnal that the U.S. has to reduce government backing of mortgages, there seems to be a clear policy alignment. Unfortunately though, the size of the U.S. mortgage market is so big, even if there is small disagreement between the parties in Congress, the length of time to resolve those differences to get to comprehensive reform could be interminable. 45

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