The recent announcement by the Consumer Finance Protection Bureau’s intention to issue a final rule on the ability to repay requirement as part of the final Qualified Mortgage definition are key milestones for the private-label residential mortgage-backed securitization market.
The final ruling on QM will provide clarity to the definition of Qualified Residential Mortgage standards as proposed under Dodd-Frank, given the fact that the latter cannot be any broader than the former, according to Fitch Rating’s outlook for 2013.
"Securitization of QRMs exempts issuers from risk retention and premium capture requirements so resolving these definitions will be a critical breakthrough for restarting the private-label RMBS market," said senior director Suzanne Mistretta at Fitch Ratings.
She added, "Finalization will, at a minimum, provide clarity to the market and allow institutions, particularly banks, to assess the costs of re-entering the market."
Simply put, all loans wrapped in government-sponsored enterprise securities receive both QM an QRM status as long as the GSEs operate under government control. It's the private market that could use some guidance.
While new issue private-label RMBS market activity remains subdued, it is expected to increase to $15 billion next year, according to Standard & Poor's ratings service.
"Agency issuance continues to dominate the market, but several issuers are accumulating collateral," according to industry reports.
Fitch is also projecting new issue activity to outpace last year as a number of "new entrants that filed shelf registrations in 2012 announced plans to securitize non-agency collateral in 2013."
However, an increase in activity — even by 50% — is still lull relative to historical standards. This is a result of the low bar set by the few deals that were issued in 2012.
Real estate investment trust properties and conduits are expected to dominate issuance in the new year. The larger banks that have held on to new jumbo loan originations could step in and securitize their own production as well.
"Strong investor appetite for yield and supply and demand technicals, together with the resolution of Dodd-Frank provisions, may lure some of these institutions back into the market. Improving deal execution is also a positive for new issue activity," Fitch said.
The other factor at hand is the guarantee-fee hikes, which are intended to closely align the cost and risk pricing of a conforming loan with that of a jumbo loan.
However, the Federal Housing Finance Agency efforts alongside the Federal Reserve continued purchases of mortgage-backed securities have had a subdued impact on both conforming and jumbo rates, despite compression in agency MBS yields, Fitch said.
For example, the spread between jumbo and conforming loans, which are quite lower than the 2009 peak, remain elevated compared with pre-crisis spread of about 20 to 25 basis points.
Still, the rating agency believes "the FHFA’s initiatives are supportive of a private capital return, which should become increasingly evident as more lenders re-enter the non-agency space, and origination volumes return to nonpeak historical levels."