The Federal Reserve Bank of Philadelphia has issued an important new paper finding that the combination of market and regulatory factors means that loss severity on modern mortgages comes to about 40%. This isn’t a temporary post-crisis hang-over, but a structural feature of the new abnormal. Absent industry revisions to the de facto rules set after the mortgage settlements and regulatory change to the CFPB’s mortgage-servicing rule, these loss levels post profound challenges to MIs, GSEs, FHA, Ginnie, and anyone wishing for the happy land of 30-year FRMs priced low enough for low/mod-income homeowners that can come from lenders, servicers, and issuers without deep capital pockets. Indeed, this loss severity is so great as to be conquered only by very high fees (which defeats the point of most mortgages) or very low credit risk (again defeating the point for all but the most affluent).
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