Summary
This is an important article because it is detailing the possible exit from the mortgage business of another player that only dealt minorly in the subprime world, if at all. One of the considerations not discussed in the article is the effect of the potential Economic Stimulus Plan specifically on conduits such as ResCap RFC.
Analysis
The Economic Stimulus Bill, if approved and implemented, will result in a great many positive measures. While mostly geared towards dealing with recession and the related erosion of consumer confidence, a key part of the bill helps to put the mortgage lending business on more stable footing. It seeks to do this by increasing the loan amount purchasable by Fannie Mae & Freddie Mac (a.k.a. the Government Sponsored Enterprises or "GSE's"), or insurable by FHA.
By increasing the loan amount from the 4's to the low 7's, much more product can be considered "conforming" and thus be securitized with similar, high quality product. The GSE's can then carry out their role in providing a stable and available flow of funds for the purposes of mortgage lending. There are few players that are affected negatively by this change, but one of those is RFC, who is the GMAC mortgage conduit referenced in the article.
A conduit is a similar entity to a GSE in that they buy product in, and securitize it for the secondary market. They use a variety of means - including wholesale and correspondent lending. to purchase a wide variety of loans that fit into their certain lending programs, and thus create a marketplace for them. RFC's niche was the high quality "jumbo loan." The jumbo loan had all the inherent credit and collateral quality characteristics as a loan originated for one of the GSE's, but had a higher loan amount. By Congress proposing the increase in the allowable loan amount, they are in fact eroding much of the niche that RFC served, as these loans will likely see both lower pricing and more streamlined execution at the GSE's.
It will be a touch decision for the GMAC sub to make, but it is clear that a key consideration has to be the evaporation of their marketplace and the possibility for them to encounter adverse conditions in loan sales if the more stratified and conforming product is going elsewhere.
