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Investments

Private-label RMBS will exceed 2013 expectations, with hurdles

The residential mortgage backed securities market is expected to continue on its positive trajectory going into 2013, but there will no doubt be challenges, according to analysis released from both Fitch Ratings and Moody’s Investors Service.

Both rating agencies aye private-label securitization activity will increase as investor demand rises and delinquency trends continue to improve in all credit sectors.

For example, Redwood Trust (RWT) has already announced its first residential mortgage-backed securitization deal of 2013 with Barclays Capital (BCS).

Origination activity was more than $1.5 trillion this year, with the majority of activity consisting of refinancings, though that is set to drop.

The increase in RMBS volume is projected to help balance the magnitude of improvement in macroeconomic conditions and a continued increase of guarantees fees charged by Fannie Mae and Freddie Mac.

Over the past year, the GSEs raised g-fees by 20 to 25 basis points through outright increases, loan-level risk-based fees and the removal of special pricing for many originators. 

G-fees are expected to rise by at least an additional 30 to 50 basis points to match recent private label execution in 2013, according to Bank of America Merrill Lynch (BAC) analysts.

This is tripled from the previously raised guarantee fees charged to lenders by an average 10 basis points in order to encourage private capital to fund the market. 

Based on projections from both government-sponsored enterprises and the Mortgage Bankers Association, origination volume is expected to drop between 15% and 20% from this year levels, Fitch stated.

The lower volume will be driven by a decline in refinancing activity, a reverse from this year, but purchases are supposed to make up at least one-half of all originations by the fourth quarter of 2013, compared to 25% in 2012.

Investor interest in prime jumbo RMBS has sparked as a result of stable home prices, declining unemployment rates and conservative loan underwriting.

"Investors’ increasing bids for prime jumbo securities drives down their yields, improving the economic benefits for originators to securitize jumbo loans rather than hold them on their balance sheet," Moody’s said.

However, both rating agencies stated that the final definitions of Qualified Mortgage and Qualified Residential Mortgage definitions will be key milestones for the market.

Deutsche Bank (DB) also reported the importance of both definitions. Simply put, all loans wrapped in government-sponsored enterprise securities receive both QM an QRM status as long as the GSEs operate under government control. It's the private market that could use some guidance.

"At a minimum, finalization will provide clarity to the market and allow institutions, particularly banks, to assess the costs of re- entering the market," Fitch stated.

In 2013, issuers are expected to introduce a new asset class backed by rental cash flow from single-family residential properties as private investors acquiring these properties search for financing options, Moody’s said.

"Although structural, legal, operational, and performance data hurdles remain, both potential issuers and arrangers have dedicated resources to address these challenges and make securitization a viable financing option for single-family rental properties," according to the Moody’s report.

cmlynski@housingwire.com

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