Richard Dorfman, managing director and head of securitization at SIFMA, testified today before the House Committee on Financial Services Subcommittee on International Monetary Policy and Trade at a hearing titled “The U.S. Housing Finance System in a Global Context: Structure, Capital Sources, and Housing Dynamics”.
In his testimony, Mr. Dorfman highlighted the relationship between U.S. housing markets and global investors. Because securitized mortgages have been distributed into financial markets to an extent that greatly exceeds the mortgage funding capabilities of the U.S. banking system alone, non-U.S. market participants play a critical role in funding the residential housing sector in the United States.
SIFMA estimates that non-U.S. investors currently hold approximately 15% of all mortgage-backed securities (MBS), both privately issued (“non-agency MBS”) and government guaranteed (“agency MBS”). The markets for both agency and non-agency MBS have become truly global markets.
“The historical facts of U.S. home mortgage market and the place of that huge industry in the world of global finance lead to its overwhelming benefit to U.S. consumers and businesses, and to the U.S. and global economies,” said Mr. Dorfman. “This great advantage occurred because of innovation and a disciplined ability to measure risk and return, and to execute responsibly, which attracted capital from around the world.”
Foreign holdings of both agency and non-agency MBS create a strong correlation between the health of the U.S. housing finance system and global financial stability. The face value of MBS of all kinds totals nearly $7 trillion, and SIFMA estimates foreign holdings to be greater than $1 trillion.
The motivations of foreign investors are generally similar to those of many domestic investors. Foreign investors, especially central banks, hold significant, in some cases vast, sums of U.S. dollars, which must be invested in a low risk, high liquidity sector. These entities must be able to buy and sell large quantities of securities on short notice. Therefore, foreign investors hold large sums of very liquid, low risk Agency MBS, especially Ginnie Mae MBS. Outside of Agency MBS markets, foreign investors became significant players in the markets for non-agency MBS until those markets froze in 2008, as some foreign investors moved out on the credit risk spectrum.
In both his oral remarks and longer written testimony, Mr. Dorfman explained why SIFMA believes the TBA (“to be announced”) trading market is vitally important to the future of housing. This market provides vast liquidity and plays a key role in attracting tremendous global capital. The TBA market also gives the consumer the important ability to obtain long-term rate locks by allowing the lenders the ability to confirm forward MBS sales into a liquid market. The daily trading volume in TBA markets over the past three years has exceeded $300 billion, second only to U.S. Treasuries in terms of fixed-income markets.
Mr. Dorfman also discussed the need to address issues in the U.S. housing finance sector: “It is critical for our country that we restore, modernize and rationalize the housing business model in order to restore housing markets, including those for housing finance and securitization, to their maximum sustainable potential,” said Mr. Dorfman. “Without this important engine of housing driving the U.S. economy, we will continue to see weak growth in jobs, income, and the overall economy. The global financial markets have been a critical component sustaining the financing of housing in America, and we must ensure this continues in the future.”