The PLS industry must self-regulate, says Center for Financial Markets

WASHINGTON – May 6, 2020 – Eric Kaplan, director of the Milken Institute Center for Financial Market's Housing Finance Program is sounding the alarm on the private-label mortgage-backed security transactions (PLS) industry and its needs to self-regulate.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act makes mortgage loan payment forbearance relief available for Federally backed mortgage loans only. However, it does not apply to non-agency loans, including those bundled into PLS.

Despite the inapplicability of the CARES Act to non-agency loans, many PLS industry participants are calling for forbearance relief to borrowers impacted by COVID-19.

“As loan payment forbearance options are implemented for homeowners struggling in the wake of the COVID-19 crisis, the PLS industry must best demonstrate its capacity to self-govern,” says Kaplan.

“Accomplishing this will be evidence of PLS’ responsible evolution since the Great Recession to deliver meaningful consumer relief. Failure to meet this challenge may signal that PLS is not ready to reassume a meaningful role in the future housing finance system.”

Kaplan, along with co-authors former Ginnie Mae president Ted Tozer and former White House housing policy advisor Michael Stegman, present their findings and recommendations in a new report, “COVID-19 Forbearance Relief and PLS: A Call for Self-Governance,”

Among their recommendations:

1. Forborne payments should be considered delinquent for FPD/EDP purposes in PLS;

2. Forborne payments should not be considered delinquent for purposes of 120-day delinquency PLS breach review triggers; and

3. Forborne payments should count as delinquencies for PLS bond cash flow purposes.

“Successful self-governance that yields uniform structural best practices in response to the COVID-19 crisis will be evidence PLS's responsible evolution since the Great Recession. Failure of the industry to meet the challenge at this moment of greatest need might just be enough for regulators and policymakers to decide that PLS is not ready to reassume a meaningful role in the future housing finance system,” the report warns.

Kaplan, along with Tozer and Stegman, are available to discuss their findings and recommendations.