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Investments

Nonagency RMBS activity hits highest point since housing heyday

The year 2013 has marked a turning point for residential mortgage-backed securities in many ways. 

For starters, new issue RMBS activity is at its highest point since 2007, according to Standard & Poor’s latest report.

Additionally, strong year-over-year gains in homes prices occurred in the first quarter, the Consumer Financial Protection Bureau released its definition of a qualified mortgage and issuance of private-label RMBS surpassed the total 2012 tally in the first quarter of the year.

As a result, issuance in 2013 for private-label RMBS will dwarf 2012 at roughly $20 billion, the credit ratings agency claims. This is up from the firm’s original expected issuance of between $12 billion and $15 billion for the remainder of the year.

"This spurt of activity is noteworthy during a time in which mortgage rates, despite a recent uptick, remain at historical lows, and the positive momentum in the housing market has somewhat overshadowed seasoned mortgage performance," said Jeremy Schneider, primary credit analyst for S&P.

He added, "We also expect regulatory and legislative initiatives to continue to be on the forefront throughout the year. While more optimistic economic conditions support a positive outlook for housing in general, our 2013 outlook for RMBS is stable."

Although prime-jumbo loans backed most transaction, servicer advances back a number of RMBS from underlying seasoned transactions.

While very high-quality jumbo mortgages with close to perfect performance have backed most conventional newly issued RMBS during the last several years, a portion of the rather battered RMBS from the last decade still shows elevated delinquency levels, S&P explained.

On a positive note, these delinquency levels have continued to decline over the last few years, largely because of credit default burnout within the pools, seasoning and home prices.

Additionally, the loss-given default declined an average of 3% year-over-year in the first quarter.

"Although these trends seem to bode well for RMBS, our stable (as opposed to positive) outlook stems from other factors, including the elevated loss levels within certain seasoned RMBS, limited principal and interest advancing by servicers, foreclosure and liquidation timelines, and the impact of loan modifications, Schneider said.

He added, "Our research has shown a continuous decline in servicer advancing (the percentage of delinquent loans for which the servicer passes through monthly principal and interest payments to the trust) over the last five-years, with a softening in the decline over the most recent year."

As the amount of newly issued RMBS grows, the number of originators has also increased. 

Furthermore, the ongoing level of servicer acquisitions and transfers in the market highlights how such transfers relate to RMBS transactions. 

Although different servicers use different procedures, policies and outlooks, a servicing transfer can affect the allocation of cash to RMBS. As a result, this activity in the servicer market reinforces the factors to consider when contemplating a proposed transfer. 

Earlier this year, both Fannie Mae and Freddie Mac released data on a portion of their guaranteed portfolios, which is an important step in the enterprises’ stated goals of piloting risk-sharing structures to evaluate various platforms for private market participation.

Additionally, draft legislation followed that focuses on changing the roles of the government-sponsored enterprises through the creation of a new federally chartered entity.

Nonetheless, "The specifics continue to be widely debated, even as the CFPB seeks to finalize and implement many of the rules related to qualified mortgages and servicing standards among others." 

Overall, this will continue to be an interesting year for RMBS, specifically in terms of home affordability and the decisions made legislatively regarding the mortgage market.

"All in all, the government's intentions seem clear: encourage the housing recovery, promote home-ownership, and minimize the taxpayers' guarantee," Schneider concluded. 

cmlynski@housingwire.com

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