The U.S. housing market has been recovering, and residential mortgage collateral performance continues to improve, a trend that Standard & Poor’s expects to continue in 2015.

Housing finance, the ratings agency says, still faces challenges and relies on government support.

“Private capital has been slow to reenter the residential mortgage market, and nonagency securitization volume remains relatively small, with diversity and growth mostly coming from nontraditional transactions in recent years,” a client note says.

Standard & Poor's believes nonagency securitization using private capital could be a key contributor to a more healthy housing finance market while limiting risk to taxpayers.

“A revival in the U.S. nonagency residential mortgage-backed securities market has not followed measured recoveries in the broader economy, employment, and housing. RMBS not guaranteed by one of the government-sponsored enterprises – such as Fannie Mae or Freddie Mac – hit a high of $1.2 trillion in 2006, but we expect that figure to be near $50 billion in 2015, up approximately $12 billion from 2014,” the report says. “Clearly, even with the ongoing recoveries in the overall economy and housing market, nonagency U.S. RMBS-related issuance remains negligible in the $10 trillion housing finance market.

“We believe the slow pace of non-agency securitization reflects a market still grappling with the changing economics of complying with new regulations, a lack of standardization in nonagency securitization provisions, anticipated interest rate hikes in mid-2015, and a cautious investor base in newly originated nonagency RMBS. Considerable clarity has emerged regarding new regulations this year, but other limiting factors persist,” they say.

The bottom line? The economy, after fits and starts since the Great Recession, appears to be on a steady recovery coursebut the nonagency RMBS market has yet to rediscover a path toward substantial growth. It remains unclear when this market will fully rebound as it continues to evolve, they say.

The full report can be obtained through Standard & Poor’s.