Private-label MBS issuance likely to remain uneconomical in 2011
In June 2007, the amount of always performing loans in the private label mortgage-backed securities market stood at nearly $2 trillion, according to data from Amherst Securities. Every month since then, the market steadily declined to a traditional low of $686 billion last month. For numerous reasons, Moody's Investors Service doesn't expect this trend to reverse this year as private-label MBS issuance will likely remain uneconomical. Housing prices continue to decline because of the growing backlog of foreclosures and that will likely increase losses on private MBS this year, according to Moody's. Analysts expect the delinquency rate of loans within MBS to decline during the year, helped somewhat by more loan modifications that include principal forgiveness that "should help prevent borrowers with negative equity in their homes from re-defaulting." Moody's expectations for increased losses despite decreasing delinquencies within MBS follow a year of relative stabilizing in the market. Analysts said cumulative losses from December 2009 through November 2010 for the 2005 through 2008 vintages rose to 14.9% for subprime pools from 11.8%. For option adjustable-rate mortgages, losses climbed to 9.5% from 5.7%, while losses for Alt-A pools rose to 7.9% from 5.2%. Losses for pools of jumbo loans increased to 1.4% for the period from 0.6%. Moody's said the robo-signing debacle last fall, where foreclosures allegedly went forward without due process, is pushing the foreclosure process back by three to six months and servicers should see increased costs ripple through, as they rework their loans. "As the new year progresses we should get a better sense of which servicers will bear remedial foreclosure costs and to what extent and which of them will pass them on to RMBS trusts and ultimately to investors as additional losses," analysts said. Moody's projects residential MBS issuance to remain limited in 2011, as the market waits for the sweeping changes included in Dodd-Frank legislation to take root while possible changes to Fannie Mae and Freddie Mac are bounced around. Analysts said the new risk-retention regulation that requires lenders hold a 5% vertical slice of any securitization "may result in originators avoiding" bundling loans into MBS. Private-label issuance will be further hindered by the federal decision to boost the limit on loans sold to GSEs that has already shrunk the non-conforming jumbo market, according to Moody's. "The high cost of securitization and compliance with the increasing layers of regulation, along with the extension of the GSE loan limits, will continue to make accessing the private label RMBS market an uneconomical funding option for most mortgage lenders," said Todd Swanson, Moody's assistant vice president. "The transactions that do come to market will likely have a very strong credit profile as a result of high quality assets, an increased alignment of interest between issuers and investors, increased disclosure of collateral and structural information, and structural mechanisms to monitor and enforce breaches of representations and warranties," Swanson said. Write to Jason Philyaw.