Secondary market.

Author:Taliefero, Michael S.
Position:Private mortgage-backed securities - Column

Recent actions by states are threatening to disrupt the market for private mortgage-backed securities (PMBS) and agency MBS not backed by the full faith and credit of the U.S. government. A few states have already imposed investment limits and/or registration requirements on private mortgage related securities. Other states are planning to take similar action.

Traditionally, states have been allowed regulatory authority to establish investment limits for public entities, pension funds and certain regulated industries (e.g., insurance companies). The states, have also had the authority to subject certain securities issuers to registration and disclosure requirements. Presumably, the reason for these laws is the protection of the investing public. There is a growing concern among state officials that the insurance industry, regulated by states, could become another crisis of S&L bailout proportions. The states may also be motivated by increased revenues from registration fees and political benefits as well. In most cases, however, the states see this as a "states rights" issue.

Prior to 1984, the crazy quilt of state law investment restrictions and registration requirements were an impediment to the development of a private mortgage-backed securities market. With the enactment of the Secondary Mortgage Market Enhancement Act of 1984 (SMMEA) PMBS issuances improved dramatically during the 1986 to 1990 period. For 1986, the volume of publicly offered PMBS stood at $7 billion. By 1989, these issuances had doubled to over $14.2 billion. For 1990, publicly offered PMBS climbed to $24.4 billion. That's three and a half times the 1986 level.

One of the ways SMMEA assisted in creating a PMBS market is by making "mortgage-related securities" eligible for investment by federally regulated depository institutions. The other important change in SMMEA was the temporary pre-emption of state investment limits and securities "blue sky" laws. This pre-emption was addressed in very broad terms. First, the act authorized any person, organization or business entity to purchase, hold and invest in mortgage-related securities or the obligations of Fannie Mae or Freddie Mac. Second, where a state had limits on U.S. securities, the act requires that SMMEA securities be considered U.S. securities for purposes of the limitation.

The potential override of SMMEA state law pre-emption not only affects private label MBS, but Fannie Mae/Freddie Mac mortgage-related...

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