Signs of Life: Private Mortgage Securities Re-Enter the Market

Last week, private mortgage-backed securities were officially put pack on the market for the first time in two-and-a-half years. Redwood Trust Inc., a Mill-Valley, Ca.-based company has partnered with Citigroup Inc. to package and sell $222 million worth of securities backed by jumbo residential mortgage loans.

With the collapse of the housing market in 2007, investors so completely shunned these investments, that only government-sponsored entities, now government-controlled entities, Freddie Mac and Fannie Mae were issuing mortgage-backed securities, severely drying up capital for all but good-credit conventional homebuyers.

These new securities are backed by jumbo loans, or those greater than $730,000 and while they are too large to be guaranteed by the government, jumbo loans are typically safer than sub-prime loans that wreaked such havoc on the markets, as only the ultra-wealthy (which typically translates to fiscally-responsible) buyers can afford to take on such financial responsibility.

“We’re still not back to normal, but the market has improved,” says Greg McBride, senior financial analyst at (as quoted in an article from “This is a positive development, and a huge step in the right direction.”

Yet the article also quotes an economics professor from Boston University, who wonders if the timing is correct.

“Are we ready for this again?” asks professor Laurence Kotlikoff. “Absolutely not. We still don’t have any checks or balances put into place to make sure we don’t end up in the same situation.”

Kotlikoff…likened the situation to the Tylenol cyanide deaths in 1984. Following that incident, Tylenol-maker Johnson & Johnson instituted safety seals on all of its products, now a standard in the industry.

“Take it from me, there still aren’t safety seals for mortgage-backed securities,” Kotlikoff says.

Hopefully proper restrictions can be set in place without much interruption as private MBS start to enter the scene again. That’s probably a na├»ve statement, but at this point some positive movement in the housing market seems more helpful than waiting months to years for regulatory details to be hammered out.

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