Moody’s Investors Service’s exclusive client report “Slowdown in Mortgage Refinancing is Credit Positive for New Jumbo RMBS” charges that lower mortgage refinancing volume could lead to a higher proportion of purchase loans in new jumbo residential mortgage-backed securities, boosting the credit quality of the pools because purchase loans typically have lower default rates.
“Rising interest rates have caused a drastic drop in mortgage refinancing applications since mid-2013,” says Moody’s Vice President and Senior Analyst Peter McNally. “This number will continue to fall as interest rates rise.”
Purchase loans borrowers with stronger credit profiles could constitute a larger proportion of jumbo RMBS pools as refinancing volume falls, a credit positive for pool performance.
“Originators generally perform a more in-depth credit review of purchase borrowers because it is their first loan review, whereas borrowers who are refinancing may receive less scrutiny,” McNally said.
McNally adds that the absence of cash-out borrowers also contributes to the stronger performance of purchase loans.
“The fact that these borrowers have taken equity out of their homes for a mortgage refinancing loan shows that they need cash, which could contribute to the higher default rates of refinance loans,” McNally said.
While the report doesn't mention specific deals, there are several recent issuances. Credit Suisse brought four jumbo RMBS since the recovery began, for instance. As did JPMorgan, EverBank and PennyMac.