Private corporations are playing a growing role in the secondary mortgage market, even issuing their own mortgage-backed securities, while a wider range of investors, rather than just savings institutions, are now holding such securities.
As a result of such activity, the secondary market in which mortgages are bought and sold no longer has the anonymity it had cultivated for so long, said Judy Kennedy, director of congressional and governmental relations for the Federal Home Loan Mortage Corp.
Freddie Mac, as the corporation is known, sponsored a 2 1/2-day conference on the secondary mortgage market in Chicago for the media early this week that underscored the important role this market is now playing.
By the 1990s, when the mortgage market should reach $500 billion, two-thirds of all mortgage credit will be financed through the secondary market, with private corporations playing an increasing role, said William Madden, Freddie Mac's executive vice president for marketing and sales.
Last year such private firms as Sears, Roebuck and Norwest Mortgage Investors issued a total of $10 billion in mortgage-backed securities, noted Leland Brendsel, executive vice president and chief financial officer of Freddie Mac.
"Because of the path-finding work of government-sponsored corporations, other players are now increasingly joining the business," said Rep. Steve Bartlett (R-Tex.), a member of the House Committee on Banking, Finance and Urban Affairs.
"Prudential General Electric Credit Corp., Sears Mortgage Securities and Norwest or Banco are some of the big names following in Freddie Mac's and Fannie Mae's footsteps."
Congress recognized the increasingly important role of these private players when it passed the Secondary Mortgage Market Enhancement Act, which removes some of the barriers that have slowed the development of private mortgage-backed securities, Bartlett pointed out.
A wider range of investors also will hold a growing amount of mortgage-backed securities, speakers said.
When Freddie Mac introduced its mortgage participation certificates a decade ago, thrifts were the principal investors, but now account for only 60 percent of PC holdings, with pension funds and insurance companies holding the balance, said Marcia Myerberg, treasurer and senior vice president for corporate finance at Freddie Mac.
"In the future, I believe mutual funds will use more and more mortgage securities," she added.
Bartlett declared that "the hottest area in Wall Street investment banking firms today is mortgage-backed securities." Half of $500 million profit made in 1983 by the New York-based investment firm Salomon Brothers was from mortgage securities trading, he said.
Because of the large amounts of money being drawn into the secondary market, and the types of investors it is coming from, mortgage interest rates are being lowered and fixed-rate mortgages are continuing to be made available, Bartlett maintained.
"The pension funds, insurance companies and other long-term investors that are now being drawn into the housing market through the secondary mortgage market are much more suitable partners for the long-term fixed-rate mortgage than are portfolio lenders dependent on demand deposits and short-term funds," he explained.
Addison Hanan, vice president in charge of the mortgage securities department in Salomon Brothers' New York office, pointed out that mortgage-backed securities have outperformed such traditional investment vehicles as high-grade corporate bonds and 10-year and 30-year Treasury notes by ratios of 2-to-1 and more.
"We've outperformed those benchmarks," he said.
"It's an exciting time for mortgage securities. You've seen a lot of innovation, and you're going to see a lot more. We're definitely a major market force," he said.