Strong underwriting standards, third-party reviews and the implementation of risk retention rules will bolster the credit quality of new post-crisis US private-label residential mortgage-backed securities in 2015, according to a new report from Moody’s Investors Service.
In addition, single-family rental securitizations will expand into more markets and new multi-borrower and smaller single-borrower SFR issuers will likely bring deals to market.
“New regulations setting strict standards for origination of qualified mortgages along with ability-to-repay rules will drive the strong credit quality of new issuance,” says Navneet Agarwal, a Moody’s Managing Director. “The credit quality of non-qualified mortgages will also be strong because they need to comply with ability-to-repay rules as well.”
Moody’s expects private-label RMBS issuance to rise slowly in 2015, only slightly exceeding 2014 levels, as opportunities diminish for issuers in key markets. The collateral backing new private-label RMBS will likely have weaker credit characteristics, but adherence to ability-to-repay rules will compensate and help maintain the credit quality of the pools.
Credit quality has also weakened because banks have been keeping high-quality loans on their balance sheets. “However, if interest rates rise, banks will securitize more of these assets, boosting credit quality and issuance,” adds Agarwal.
In addition, new deal structures are emerging that will diversify issuance. SFR issuers will enter new markets, large non-bank servicers will likely issue deals backed by servicer advance facilities, and efforts by government agencies to sell the non-performing loans in their portfolios will provide a steady stream of mortgage loans for securitization.
Legacy private-label RMBS will perform better in 2015 as well, because delinquencies will fall as the economy continues to improve. However, loss severities for seriously delinquent loans will continue to increase.
“Long liquidation periods, especially in judicial states with longer foreclosure timelines, will continue to result in high loss severities,” says Linda Stesney, a Moody’s Managing Director. “These extended timelines will offset the overall better conditions that are boosting home prices.”
Liquidation timelines in non-judicial foreclosure states will begin to gradually decline. In addition, the improving US economy will result in a declining number of loan modifications and short sales and will also contribute to improving RMBS deal performance.
“The overall credit quality of legacy RMBS will also benefit from increased regulatory scrutiny of non-bank servicers,” says Stesney. “However, regulatory actions that further delay foreclosure or increase loan modifications would negatively affect the transactions.”