Boston, June 2, 2011 – A new report from Aite Group reviews and analyzes the structural, contractual, and regulatory issues and challenges that will keep the U.S. residential mortgage market at a low idle for the foreseeable future. It examines a number of issues impacting issuance volumes, including non-agency mortgage-backed securities (MBS), the role of credit rating agencies, and the private mortgage insurance industry.

Following the collapse of the U.S. residential mortgage market, a number of issues became apparent concerning U.S. mortgage securitization, including reliance on credit ratings, leverage multiples embedded in structures, and lack of transparency in the pricing and valuation process. Risks, too, appeared in a number of different guises, including liquidity, market, and counterparty risks. Today, the market structure of the US$11 trillion U.S. residential mortgage-backed securities market still struggles to find firm footing. The issuance of MBSs is at low ebb, and tilted in favor of what many cite as a significant source of the financial meltdown—the U.S. agencies that guarantee mortgage securities (i.e., Fannie Mae and Freddie Mac). Indeed, more than 95% of U.S. MBS issuance has been agency-backed in the last year; it follows, then, that credit-sensitive MBS issuance has been virtually nonexistent. Despite this, it is the credit-sensitive MBS sector—not the agency-backed MBS sector—that will experience greater securitization issues.

“An improved economy and employment picture will no doubt support a healthier overall MBS market,” says John Jay, senior analyst with Aite Group and author of this report. “Even so, the process of underwriting, issuing, analyzing, and reporting has gotten significantly more complicated than it was during the MBS heydays of 2003 through 2007.”

This 17-page Impact Note contains six figures. Clients of Aite Group's Institutional Securities & Investments services can download the report.