Last month, Maryland’s Office of Financial Regulation put the US mortgage-backed securities market in limbo with emergency regulations that require passive trusts to be licensed in the same way that lenders or servicers are.
In doing so, the OFR claims to be clarifying earlier licensing laws. But in reality, it is creating new uncertainties, placing an unnecessary burden on the MBS market, and it will ultimately hurt Maryland consumers.
The ruling must be quickly reversed.
Outlier
Passive trusts are the legal entities that hold mortgages for an agency or non-agency MBS deal.
Maryland’s proposed new regulations build on an April 2024 ruling, in which a court held that an assignee (such as a passive trust) must obtain a license before having the legal authority to foreclose on a property in a Maryland court.
Although the OFR suspended enforcement of the new temporary regulation until April 10 to allow time for licensing, and it expires on June 16, it has now submitted a permanent version of the same regulation for public comment.
The decision makes Maryland an outlier, with different regulations from the 49 other states, and issuers have immediately begun taking the safe option when faced with uncertainty over how the rule will be enforced and implemented.
In a move that will ultimately be to the detriment of state's mortgage market, some have already opted to exclude Maryland collateral from deals.
Broad reach
Even though Maryland makes up a small share of the mortgage market, most transactions contain at least some collateral from the state.
This puts almost all MBS trusts under regulatory scrutiny in Maryland — particularly as the broadest reading of the rule would see it apply to existing trusts as well.
Besides a rise in costs from additional red tape, the current uncertainty will hinder mortgage originators in the state from using securitization and could dry up liquidity for mortgages in the state.
Non-bank originators, as a business model, rely on quickly turning over their loans after origination to aggregators. If aggregators are less willing to purchase Maryland loans because of regulatory uncertainty, mortgage interest rates could rise in the state as originators pass on their higher costs of capital to homeowners.
Range of uncertainties
Part of the uncertainty also stems from how broad and unclear the regulation is. Various interpretations yield vastly different outcomes for the rule’s impact, and the sheer number of unknowns adds fuel to the fire.
Does this apply to all existing deals containing Maryland mortgages, or is it just for future ones? What does it mean for ABS deals?
While banks are exempted from the rule, there is even uncertainty on how Maryland will handle trusts owned by banks.
Some participants deem it best to forge ahead and take necessary steps to comply with the law rather than game out what will happen. Pimco seems to have taken this route. Its first non-qualified mortgage securitization of 2025, Bravo 2025-NQM1, included Maryland collateral.
But others might take the view that the regulation is temporary, and that the regulators will soon realize how poorly constructed it is and undo it.
A best case scenario is that Maryland quickly sees the parallels between this debacle and a situation in Georgia in 2002-03. Back then, a piece of ambiguous legislation caused mortgage market liquidity to dry up in the state before the legislature corrected the issue the following year.
The sheer number of uncertainties that Maryland’s OFR has not clarified make it a half-baked policy proposal that will ultimately hurt consumers. Regulators would be wise to walk back — or at least clarify — the proposal.