Why Private Investors Are Staying Away From Mortgages

by 06 Aug 2012

(CNBC) -- As homebuilders gain confidence and real estate agents claim demand is back, one would think investors would jump right back in for fear of missing the bottom. Investors in housing are buying up as many distressed properties as they can find, but investors in the mortgage market are still sidelined, burned by the subprime bust that left many of them with huge losses.

The private investor share of the outstanding mortgage market fell below $1 trillion in July to $999.7 billion, according to Amherst Securities. This is down from $1.8 trillion a year ago and $2.3 trillion at the peak in 2007.

“Since this is somewhat of a psychological barrier we are crossing, we naturally asked the question how long it might take to cross other benchmark market sizes,” wrote Amherst’s Laurie Goodman in a monthly report. “In the absence of any new issuance, we estimate the market will broach $750 billion in June 2014 and $500 billion by February 2017.”

The private investor share of the market has been dropping precipitously since the crash of the mortgage market, as millions of borrowers defaulted on loans, but even as the market now recovers there has been little to no new issuance. 

Fannie Mae, Freddie Mac, and the Federal Housing Administration back more than 90 percent of all new loans, whereas they were barely one third of the market during the housing boom. Only Redwood Trust, which doesn’t originate loans but issues securities on pools of largely jumbo loans, is in the game and growing.

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