Housing prices, CFPB rules fuel RMBS analytics
The CFPB defined the qualified mortgage and ability-to-pay rule earlier this month. Simply put, the borrower has to have the ability to repay the mortgage, changing how mortgages are underwritten and how loans are refinanced.
Given the new rules, traditional underwriting standards are expected to make a comeback, Firestone said.
For instance, "new loans originated in 2014 may have very low defaults rates because the borrowers will repay the loans," which is not necessarily what originators were looking at during the past few years.
The prepayment and default patterns of mortgages influence the cash flow of bonds, which is "an important part of doing any type of mortgage analysis and understanding these relationships," Firestone added.
Housing prices are another market condition that effects the analytics of RMBS.
The housing market continued to gain momentum throughout 2012 and recent forecasts suggest the industry will continue turning positive, region by region, in 2013. Thus understanding, projected home price indexes is important in analyzing bonds, Firestone stated.
Fannie Mae recently noted that the housing market is poised to contribute to overall growth, providing a rising contribution to gross domestic product in 2013.
Housing starts are expected to rise by 23% in 2013 to 950,000 units, following a similar trend in 2012, the government-sponsored enterprise stated.
Firestone noted three steps in the analysis of RMBS bonds: a projection of collateral performance and of bond cash flows, and then a repeat of both of those steps.
Both steps recommend using available tools of loan-level data, structuring systems and housing price forecasts to decide which RMBS bonds are the most attractive to invest in.