Tide starts to turn for mortgage securities You won't hear the phrase "subprime mortgage" on a Wall Street securitisation desk any time soon, but you might start hearing more about private-label mortgage-backed securities in 2013. There's no need to run for the hills. This could be the next step in the US housing market returning to health and stability. From investors through bankers to policy makers, there is agreement that the US needs to wean its mortgage market off government life support, so the question now is how big and what kind of a role will there be for private capital. Answering that question will have to wait for Congress to deal with the fiscal cliff - but after that, it could be an auspicious year for tackling long-term reform of housing finance, says Barbara Novick, head of government relations at BlackRock. Where we stand today, we have house prices improving, inventory declining, housing is starting a recovery and the trends are good. The political environment is such that you can address housing. If they miss this window, they miss it for a long time. This is the sweet spot, 2013. The market for private-label securities - that is, mortgage-backed bonds issued without a government guarantee - dried up with the financial crisis. Now, new mortgages are either held on lenders" books or securitised by the government-owned finance agencies Fannie Mae and Freddie Mac, which charge a fee to guarantee the underlying mortgages against defaults. Less than $3bn in private-label securities were issued this year, all of them on expensive homes whose mortgages were too large to be guaranteed by the agencies. These bonds were snapped up by investors, and there has also been strong buying of private-label MBS issued before the crisis, by investors desperate for the higher interest rates these securities pay. "There is plenty of investor demand for the asset type, as you can see from where legacy non-agency bonds are trading," says Michael Canter, director of structured asset research at AllianceBernstein, the fund manager. In this yield environment, any new product that offers a yield advantage would be welcome. Banks are holding more mortgages on their own balance sheets instead of sending them to Fannie and Freddie for securitisation. With few high-yielding investment opportunities around, they are more attractive than usual to banks. It remains to be seen if this is a precursor to private-label securitisation. Barclays expects issuance to remain below $20bn next year, an improvement but still a fraction of the market for agency MBS. The reason is that funding mortgages in the private-label securitisation market is simply not yet as attractive for a lender as keeping them on its own books or selling them in the agency MBS market, where the Federal Reserve's bond buying programme has caused a shortage of supply and soaring prices. Fannie and Freddie are raising guarantee fees, which will reduce their advantage over the private market, but the regulatory "rules of the road" are still not clear enough for private investors to return in numbers. Authorities in Washington are debating new mortgage servicing rules, capital requirements for banks, a rule that would require lenders to verify a borrower's ability to repay the debt, and a requirement that forces securitisers to keep a slice of the loan to ensure their interests are aligned with those of investors. Most of these rules are to be finalised in early 2013, with the exception of bank capital requirements. Despite greater clarity on private securitisations, the question of what Washington will do with Fannie and Freddie will continue to hang over the industry. The Obama administration agrees they should be wound down, but wants continued government involvement in the market. Not everyone shares Ms Novick's optimism about the prospect for reform. Analysts at Keefe, Bruyette & Woods this week predicted a decision would be put off, in part because Fannie and Freddie are now turning a profit for the federal government. AllianceBernstein is lobbying for a completely different way of getting private capital into the mortgage market, by creating "first loss insurance" that could be sold to private investors by Fannie and Freddie, so that the government guarantee would kick in only if there are widespread defaults such as in a recession. But Moody's, for one, is predicting an uptick in private-label MBS next year. "The increase in volume will reflect the magnitude of improvement in macroeconomic conditions and the continued increase of guarantee fees charged by Fannie and Freddie," according to the rating agency's published 2013 outlook. This trend will continue as the US government works to reduce its exposure to future mortgage loan losses.