A note to clients from Moody’s Investors Service says collateral quality for private label residential mortgage-backed securities and credit card asset-backed securities in the limited number of new transactions issued in recent years remains as high as it was in the first post-crisis transactions.
Moody’s is also positive on single-family REO-to-rental.
This comes as the Treasury Department is seeking public input on how to bring in more private capital to the RMBS market.
“The strong collateral currently backing card ABS is largely the result of weaker card accounts exiting the trusts during the recession, a gradually improving economy and the lack of new accounts entering the pools,” says Moody’s managing director William Black.
“As both the economy and the market for card-backed securities continue to recover, the credit quality of credit card securitization trusts will weaken as issuers loosen underwriting standards and start adding receivables from new accounts to the trusts,” Black said.
According to Moody’s managing director Navneet Agarwal, “Single-family rental securitizations have a high-risk profile, but with the appropriate collateral quality, sponsor, and property manager, and the necessary structural and legal features, they can receive investment-grade ratings.”
Residential mortgage-backed securities (RMBS) are another exception to the trend of rising collateral risk. The handful of private-label “jumbo” deals that have come to market since 2012 have been backed by mortgages with pristine borrower credit characteristics. Low loan-to-value ratios (LTVs), high FICO scores and low debt-to-income (DTI) ratios show that borrower credit quality in this subsector remains strong. Despite the soundness of private-label mortgage loans, however, jumbo issuance has been low because banks retain the modest number of mortgages that exceed the GSEs’ loan limits.
The resolution of two regulatory issues, while still a challenge to origination volumes, will support the ongoing strength of private-label RMBS:
» Implementation of risk retention rules will cause an alignment of interests between the lender and the sponsor, adding to the credit enhancement of RMBS transactions and bolstering their good credit quality further.
» New ability-to-repay (ATR) rules by the Consumer Finance Protection Bureau (CFPB) will ensure the overall high quality of loan origination. But mortgages that do not meet the new rules’ underwriting criteria will incur higher legal costs and penalties than those that do and will have higher loss severities on defaulted loans as a result.