The housing market recovery did not translate into a healthy market for non-agency residential mortgage-backed security issuance, which remained stagnant.
A November report even showed that prime jumbo bonds all but disappeared from the market in 2016. It showed that as of September 25, there were only eight prime jumbo securitizations issued in 2016. Compare that to 35 prime jumbo securitizations that were issued in 2015, 28 that were issued 2014, and 31 that were issued 2013.
There are several reasons for the lack of growth in the RMBS market, the first being that Fannie Mae and Freddie Mac issuance dominated the market, according to the U.S. RMBS 2017 Market Outlook report from DBRS, a full-service rating agency. The second reason is that banks’ balance sheets are so robust that they prefer to hold mortgage portfolios rather than securitize them.
And finally, the persistently low interest rate environment rendered securitization uneconomical for many issuers, the report explains. However, as interest rates begin to rise, the RMBS market is beginning to change.
DBRS explains that higher rates facilitate the return of securitization economics and may incentivize certain banks to unload the fixed-rate mortgages in their portfolios. In fact, the rise in interest rates could lead lenders to shift their focus away from refinances and towards other types of mortgages.
Lenders could turn their focus to non-qualified mortgage originations, which of course which create more demand in the RMBS market.
However, a recent report from Morningstar suggests that between the Fed’s decision to raise rates in 2016 and the indication that more rate increases are to come, prepayments will fall throughout 2017.
However, the GSEs’ influence on the market may not be eliminated anytime soon as the new administration is likely to focus more on healthcare and immigration.
In fact, DBRS predicts if the GSEs continue to remain profitable and generate good returns for the U.S. Department of Treasury, they will remain low on the list of priorities. The company said the new administration will be hesitant to make any drastic changes to GSE ownership that could potentially disrupt the balance of the current mortgage and refinancing market.
The long run, however, holds more hope for the RMBS market as President Donald Trump’s administration stated its intention to scale back certain provisions of Dodd-Frank and to further de-risk the GSEs.
But not everyone is as optimistic. Back in November, Standard & Poor’s Global Ratings projected a total of $30 billion in private RMBS-related issuance in 2016, coming in below both 2014 and 2015.
For comparison, this chart from sifma shows that before the housing crisis, the non-agency RMBS market pulled in nearly $1.3 trillion in 2006.
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But S&P doesn’t expect the mortgage bond market to improve by much in 2017 either. The company’s forecast is for a total RMBS-related issuance of $35 billion in 2017, which again, would be below 2014 and 2015.