RMBS issuance in July will come in at approximately $90 billion, which is significantly improved from June and May, a client note from FBR & Co. says.
This level of issuance correlates to approximately $112 billion of residential originations and equals a run-rate of $1.2 trillion to $1.3 trillion per year.
“That said, July's results would imply year-to-date originations of approximately $633 billion,” FBR tells clients. “With the historically strongest months behind us, however, we believe the strong pace set in July could slow materially in August, September, and beyond.”
FBR analysts will be watching this trend closely as an equally strong start to the fall could put the industry on track to exceed FBR’s current origination estimates, and limit the potential damage from excess capacity.
Activity in August and September is expected to slow.
Last year, third quarter originations declined 25% from second quarter levels.
Based on the most recent estimate of $295 billion of originations for the second quarter, this would imply originations of $221 billion in the third quarter.
“With approximately $112 billion of originations in the month of July alone, we believe third quarter is well on its way to surpassing 2Q results,” FBR tells clients. “That said, we expect August and September to slow relative to July. Should these prove as strong, our outlook for FY14 industry origination volumes could improve from our current expectation for a sub $1 trillion market.”
Of the nonbanks and banks in the mortgage space that haven’t yet reported earnings for the quarter, FBR thinks their second quarter results will tell the tale of the coming third quarter.
“We will look for color on pipeline expectations in the third quarter and margin expectations to gather a read-through for the second half of the year,” the note says. “That said, we largely expect 2Q14 to be a choppy quarter for originators, particularly those who have been growing their platforms in a down market.”
In the last week of July, Fannie Mae announced changes to a number of its policies surrounding derogatory credit events.
FBR says that the biggest changes primarily could benefit borrowers who had a major credit event (e.g., foreclosure, bankruptcy) with additional changes to borrowers affected by pre-foreclosures and deed-in-lieu foreclosures.
“Ultimately, we believe further policy support and clarity surrounding regulatory issues will be necessary for the banks themselves to expand their credit boxes,” FBR says.