Barclays Capital Sees Limited Non-Agency Lending in Short Term
Barclays Capital (BCS) doesn't expect "widespread" non-agency lending in the short term. But the sector "is bound to make a comeback, although clearly not to its previous glory and potentially in a different form," analysts at the investment bank said in a research note Friday. Barclays expects "an economic and housing recovery, along with reduction in risk aversion, will likely be required on the part of originators to jumpstart lending." Non-agency lending needs a funding source and much of that traditionally has been done through securitization but that is "currently being stymied by pricing pressures and regulatory challenges," according to Barclays. Still, analysts believe agency execution for GSE and FHA eligible loans and portfolio execution for non-GSE/FHA eligible loans is "the most logical choice for originators and will remain so for the foreseeable future." Barclays said analysts reached this conclusion by comparing exit options along credit risk, capital requirement and funding costs for originators. As for non-agency investors, analysts said a "judicious choice for base case is continued slow prepays with a mild pickup in the back end." "In our base case, securitization volumes will remain muted until more clarity emerges on the regulatory front. If reliance on rating agencies decreases, then investing there will likely become more resource-intensive over time," Barclays Capital said. Meanwhile, the Treasury Department reports that the federal Public-Private Investment Program has led to a slight uptick in prices of non-agency mortgage-backed securities increasing profits for participating funds. As reported by HousingWire in late July, PPIP managers are now seeing returns of close to 14%, compared to 8% in March and under 2% in December 2009, according to Pensions and Investments. Write to Jason Philyaw. The author holds no relevant investments.