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Conference dispatch: The overall non-agency mortgage market struggles, successes

A take on two conferences

Last week, owing to an apparent breakdown in internal communications, one of the industry’s leading conference producers held two competing securitization conferences on the East and West coasts.

This forced many industry participants to choose between ABS East in Miami and  Mortgage Notes Non- and Re-Performing Loans Symposium in Santa Monica, California. A few determined conference goers, myself included, racked up frequent flyers miles to attend both.

Despite Zika virus fears, ABS East reportedly drew more than 4,000 attendees to Miami. But many of the attendees were there for other ABS categories: auto, credit cards, CMBS, marketplace lending, etc.

Residential mortgage-backed securities and housing finance still had prominent positions in the program, but were increasingly overshadowed by asset categories that had more issuance and news to share.

This is not to suggest that there haven’t been positive developments in the private-label securitization market, because there have been. Members of SFIG were at the conference discussing the progress of RMBS 3.0 and pointing to significant agreement on the role of the new Deal Agent in private label.

But over the past year, private-label issuance has been sluggish. By Standard & Poor’s count, only $22 billion in non-agency RMBS have been issued this year, compared to $35 billion a year ago.

The big difference has been the falloff in prime jumbo deals, as several leading conduits/issuers have exited the market. Having said that, just this month, JPMorgan did issue a $395 million jumbo deal.

Today’s ultra-low interest rate environment continues to be the main hurdle for private-label issuance because it doesn’t provide enough yield to make these deals worthwhile. A Fed rate hike in December would be a positive step for RMBS, but rates would have to rise significantly above where most observers expect them to go before the economics would improve and investor demand return.

Until then, jumbos will continue to go on to bank portfolios and the secondary market execution of choice will be whole loan trading.

Non-QM: Demand outstrips supply

During the past year, at least two issuers—Angel Oak and Deephaven—have brought un-rated private deals to market that have included non-QM and even non-prime collateral. The two Angel Oak deals included our company as a Representation and Warranty Reviewer, which some observers refer to as a “Deal Agent-Lite.”

So far, no Deal Agent has been named in a security—most likely, because the few deals that have come to market have been able to attract investors without one. The thinking in the meetings I attended at ABS East was that issuers will include Deal Agents when 1) investors start demanding them, 2) the collateral gets less pristine, and 3) the flow of deals picks up.

The good news is investor appetite for non-QM appears to be growing. Today, there’s definitely money on the sidelines. But what’s not there is product.

Aggregators are having difficulty in finding lenders that are originating non-QM loans. We’re hearing that it’s simply not worth the time, effort and risk involved. And from a purely practical standpoint, why would an LO spend days working on a non-QM file, when there’s a pipeline of streamline agency purchase and refinance loans to do?

Private capital is coming back

Although the outlook for private-label RMBS is still a moving target, private capital is being deployed elsewhere within the housing finance continuum, and several well-attended panels focused on these successful niches.

GSE credit risk transfer deals are expected to hit $30 billion this year, when you include STACR, CAS and re-insurance. These deals, Well Fargo’s Casey Neilson told the audience, “are the non-agencies’ most liquid subsection.”

Other panelists noted that the universe of investors and insurers is growing and that it may soon include more REITs, as well as international investors.

Five years out, Neilson estimated that credit risk transfer deals could be a $75 billion to $100 billion market.

The single-family rental market, which has been a very active source of new securitization over the past few years, regained traction in the second quarter after spreads tightened for commercial mortgage-backed securities, in general. The SFR panel at ABS noted falling homeownership levels, higher rents, low vacancy rates and continued housing price appreciation are continuing to be tailwinds for this market.

Jonathan Ezrow, the Chief Financial Officer of Pretium Partners, noted that institutional investors are now laser-focused on operating costs to maintain attractive returns to equity investors even if yields decline.

All’s well with NPL/RPL

In 2015, NPL/RPL deals topped $35 billion and this year, said panelists at ABS East, the number, while lower, should still be in the $28 billion range.

The NPL/RPL panel at ABS East focused on the trends driving these deals, how they’re structured and the challenges that RPL issues face with their rated deals. Diane Moormann of Nationstar Mortgage, for example, noted that the collateral in RPL deals often has title, recording and data integrity issues. Moorman and Kevin Dwyer of Morningstar both emphasized that due diligence was the only way to get comfortable with the potential risks associated with RPL.

While, NPL/RPL was one panel at ABS, it was the entire focus of the program in Santa Monica. Despite the scheduling conflict, the Santa Monica program had a pre-registration of more than 500, as well as a significant amount of walk-ins. The attendees included large institutional investors, leading investment banks and a number of smaller private investors.

The appeal of NPL/RPL is simple: they are mortgage-related products looking for a home and for private capital—something that can’t be said for jumbos or conforming loans. Also, they offer enough yield to make money and to make securitization viable.

The sense at the conference was that, while the flow of NPL will eventually trail off, it won’t happen overnight, because the agencies are still holding a fair amount of significantly distressed loans. Meanwhile, there will continue to be a steady stream of RPL as the economy and housing prices improve.

The speakers at the conference agreed that the market has gotten more crowded, and that more competitive pricing means investors need to have a focused business plan and know their own strengths.

Smaller investors at the conference said they are hoping that the agencies will come to market with smaller pools in the future so they have a chance to compete.

The mood was upbeat and the level of energy was high. (So much so that a new NPL East conference is now scheduled for early next year.)

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