Moody’s: Low interest rate environment key to mortgage securitization recovery
A low interest rate environment is expected to be critical for maintaining the ability of underlying obligors to pay or refinance. Governmental policies supporting as much will have the greatest effect on residential mortgage-backed securitization and multifamily commercial mortgage backed securitization in the new year, according to Moody’s Investors Service global structure finance 2013 outlook.
The ability of borrowers to lower their debt burdens by refinancing reduces the incentive to default in regards to RMBS.
New issuance in the private-label mortgage market remains spotty, totaling $5 billion in 2012. But with stable mortgage rates and continued improved underwriting, the economics of securitization is expected to improve, leading to higher issuance volumes in 2013, according to a Credit Suisse 2013 outlook report.
However, high government-sponsored enterprise loans limits and strong bank bids for high-quality jumbo loans will keep new issue flows limited to between $10 billion and $15 billion in the new year.
The low cap rates in which lenders are now accepting increases the probability of refinancing for loans coming due for CMBS. However, new loan originated with low cap rates will have a harder time refinancing in the future if rate hikes were to occur.
"One of the highest priorities for the president and Congress will be to solve the housing crisis, including forming a plan for government-sponsored entities (GSEs)," the outlook stated.
In regards of credit, ensuring access to financing or debt capital is significant in supporting property prices for both RMBS and multifamily CMBS. This is important to contain losses on liquidations of foreclosed properties.
Both Fannie Mae and Freddie Mac loss mitigation programs are also expected to impact RMBS performance.
"While these programs will continue to provide guidelines for private-label RMBS modifications and short sales, servicers will follow private programs that are more aggressive and can reach a larger population of distressed borrowers," the report said.
In October, vice president Leslie Peeler of Fannie Mae said the GSE recognized the loss-mitigation process had become complex for mortgage servicers and borrowers, prompting new ways to improve it.
"What we are looking to do is eliminate the pieces of the process or reduce the pieces that are not critical to reach a decision that is best," Peeler said.
Risk retention proposals are expected to help maintain the credit quality of securitizations by encouraging originators to maintain high underwriting standards, especially in CMBS.
The tightening of underwriting during the crisis has resulted in unwinding in certain sectors including the credit quality view of new commercial estate loans.
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