S&P: Mortgage bond issuance doubled in 2017, will continue rising in 2018

RMBS issuance jumped from $34 billion in 2016 to $70 billion in 2017

Back in June, Standard & Poor’s Global Ratings said that 2017 was on track to be the best year for the residential mortgage-backed security market since 2013.

Now that the final numbers are in, it looks like 2017’s mortgage bond issuance exceeded even the sunniest of forecasts.

S&P’s original 2017 forecast for RMBS-related issuance, which S&P defines as prime, re-performing/nonperforming, rental bonds, servicer advances, and risk-sharing deals, was $35 billion.

Later, the ratings agency raised its forecast to $50 billion, based on the strength of the first few months of the year.

June’s report suggested that if the pace of issuance continued for the rest of the year as it had in the first part of the year, RMBS-related issuance could hit as high as $65 billion in 2017.

But thanks to a strong close to the year, with October, November, and August checking in as the year’s top three months for RMBS issuance, last year’s RMBS-related issuance actually hit $70 billion.

That’s more than double the previous year’s total of $34 billion. It’s also well above 2015’s total of $54 billion and 2014’s total of $38 billion.

So what drove the 106% increase in RMBS issuance in one year?

According to S&P analysts Jeremy Schneider and Joseph Speziale, the mortgage bond market grew “not only in traditional sectors but also in areas such as single-family rental and credit risk transfer transactions.”

But the “most notable feature” of 2017’s RMBS market was the increase in non-qualified mortgage issuance and issuers seen throughout the year.

“Residential mortgage originators also started to figure out the risk retention puzzle,” S&P’s analysts also noted.

The analysts also suggest that the solid performance of post-crisis securitizations is a cause for the increased interest in the sector.

“Along with the broader economy, residential collateral is continuing a lengthy period of strong and stable performance,” the analysts note.

And the analysts project that RMBS issuance will continue “spiking” in 2018.

S&P currently projects between $80 billion and $100 billion in RMBS-related issuance in 2018, and expect RMBS performance to remain stable this year.

Factors that could impact 2018’s RMBS issuance include the ongoing regulatory reduction efforts being undertaken by the Trump administration, which S&P views as “trending more favorably” for the mortgage industry, as well as the impact of tax reform.

“We are also examining the potential implications of the new tax plan, which may affect affordability and home prices by limiting the mortgage interest and property tax deductions available to borrowers,” the analysts write. “The impact of tax reform will vary with home value and may have little impact on the typical property contained in RMBS.”

One area where the tax reform bill could impact real estate is on higher-value properties, which S&P categorizes as those over $1 million.

“Our initial analysis suggests that the lost tax deductions may affect homeowners' free cash flow by as much as 0.5%-1% of the property value on an annual basis, depending upon local tax rates,” the analysts write. “Consequently, we expect that overall long-term home price appreciation for these properties could be dampened by 15 percentage points or more.”

But the analysts caution that the immediate impact of tax reform on home prices may be difficult to determine based on the number of factors that influence home values.

On the other hand, the analysts suggest that the lost tax deductions may drive some borrowers to prepay their mortgages and could also eventually reduce the aggregate default rate for pools of higher value loans.

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