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RMBS issuance likely to hit $35B in 2014

QRM standard will boost nonagency investor appetite

Decreasing loan size limits, marginal guarantee-fee hikes and the finalization of the Qualified Residential Mortgage rule will support new private-label issuance going into 2014.

However, unless ‘AAA’ rating execution improves measurably, investors can expect nonagency residential mortgage-backed securitization issuance to be limited to roughly $35 billion, according to Barclays (BCS).

"Credit expansion will likely be incremental, with originators reaching out to lower FICOs and higher loan-to-value ratios," explained Barclays analysts.

They added, "Non-qualified mortgage originations should return, but are unlikely to be a driver of credit expansion."

The Consumer Financial Protection Bureau finalized QM rules in January, setting minimum standards to prohibit a lender from making loans without regard to a borrower’s ability to repay.

The final rules, which will be implemented at the start of 2014, provide a safe harbor from legal liability for loans that meet certain standards.

In August, a revised proposal for the QRM rule was released that would sync the definition of QRM with QM.

Consequently, RMBS investors will not be subject to a 5% risk-retention requirement, Barclays pointed out.

"Adopting this proposal could constrain credit availability in the private-label markets in the long run and would be at cross-purposes with the push to reduce the footprint of the government-sponsored enterprises and the Federal Housing Administration," analysts argued.

They continued, "If the QRM proposal that equates the definition to QM is adopted as the final rule, it could provide a boost to nonagency issuance."

G-fees are already higher than what the nonagency market charges purely for the credit cost of securitizing loans, which is evident from the clearing levels in the GSE credit tranche market.

The primary driver for a g-fee hike by the Federal Housing Finance Agency is the desire to protect taxpayers and equate the economics in both primary and secondary mortgage markets to reduce the footprint of the enterprises.

However, despite the increase in g-fees, the nonagency market remains uncompetitive due to the ‘AAA’ basis to agency To-Be-Announced assets

Currently, nonagency AAAs trade more than four points below agency mortgage-backed securities coupons, Barclays noted.

For loans that the GSEs are willing to guarantee, the AAA basis currently makes it unattractive to issue nonagency deals.

Furthermore, even on loans not covered by the GSE loan limits, the portfolio bid remains stronger than the nonagency bid.

On the reverse side, if the AAA basis were trading closer to historical average levels in 2004 through 2006, the effective g-fees are much closer to where current ones are set, in some cases lower.

"As the FHFA tries to equate these two markets, it could continue to increase g-fees, but this is becoming harder to justify for credit cost of the mezzanine and sub tranches," Barclays analysts said.

They concluded, "Overall, nonagency AAAs seem fairly cheap and should grind steadily over the coming months. Assuming the economy continues to recover and there are no major surprises, we expect issuance in 2014 to more than twice what it was in 2013."

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