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Flagstar is banking on the private-label market

The lender’s pending merger with a New York bank should further strengthen its secondary-market muscle

Alessandro P. DiNello, president and CEO of president at Flagstar Bancorp

Flagstar Bancorp. has been on a tear in 2021 when it comes to pursuing private-label securitizations, with 13 deals backed by some 22,000 home loans valued at $8 billion now under its belt through mid-November of this year.

A pending merger with a New York bank boasting $58 billion in assets, once finalized, promises to further bolster Flagstar’s activity in the private-label space in the year ahead. Troy, Michigan-based Flagstar, a federal savings bank with some $27 billion in assets, and New York Community Bancorp (NYCB) announced plans to merge in April. 

The lenders’ shareholders voted to approve the $2.6 billion deal in August. But the merger with NYCB, the top multifamily lender in New York, is not expected to close until sometime next year, as it still needs to be blessed by state and federal regulators.

“Upon closing, the combined company will have $85 billion in total assets, operate nearly 400 traditional branches in nine states, and 86 retail lending offices across a 28-state footprint,” NYCB stated in a press release. “It will have its headquarters on Long Island, N.Y., with regional headquarters in Troy, Michigan, including Flagstar’s mortgage business.”

That mortgage business has been driving Flagstar’s robust private-label residential mortgage-backed securities (RMBS) activity so far this year. Through mid-November, that RMBS deal-making is split between securitizations backed by mortgages on investment properties and second homes, and offerings collateralized primarily by jumbo loans — the latter being high-value mortgages ineligible for purchase by Fannie Mae or Freddie Mac.

Flagstar, through its conduit Flagstar Mortgage Trust, has sponsored eight private-label securitization deals this year so far backed by investment-property loans and five backed primarily by jumbo loans, according to bond-rating agency reports. The investment-property deals involved a total of 18,585 loans valued at $4.9 billion while the securitizations linked to jumbo loans involved a total of 3,494 mortgages valued at $3.1 billion.

Flagstar’s most recent jumbo-loan RMBS securitization is slated to close on Nov. 19. “The pool [for the private-label transaction] comprises loans that Flagstar originated through its retail, broker and correspondent channels,” states a recent presale report published by Fitch Ratings. “… A total of 178 loans in the pool are over $1 million, and the largest loan is $2.7 million. … Approximately 31.8% of the [loan] pool is concentrated in California.”

In fact, all 13 of Flagstar’s private-label issuances this year have involved mortgages originated through Flagstar. And across the 13 transactions, according to bond-rating reports, between 30% and 50% of the loans backing the offerings were originated in California, with Texas being the second-leading state — in the range of 6% to 14% of the mortgage originations across the 13 deals.

The surge in private-label transactions and deal volume in 2021 has been propelled, in part, by changes in January to the Preferred Stock Purchase Agreements governing the government-sponsored enterprises — which are operated under conservatorship by the Federal Housing Finance Agency. The key change was a cap placed on the GSEs’ acquisition of mortgages secured by second homes and investment properties. 

The amendments to the PSPA, however, were suspended in September 2021 and are now under review by FHFA. 

Still, even with the roll-back of the amendments, Michael Franco, CEO of due-diligence firm SitusAMC, says there is still a path in the private-label market for deals backed by investment properties. He also noted that rising home prices are propelling jumbo-loan securitizations in the private-label market.

“You are seeing appetite increase for private-label securities aided by robust originations, but also the fact that home-price appreciation means that more loans are falling into a jumbo [category], so a lot of mortgages are no longer agency-eligible,” Franco said. “And the changes to the PSPAs that came out under the Trump administration were subsequently undone, but if you know how to cut your [mortgage] pools correctly, it’s still more advantageous in many cases to deliver them into a private-label securitization.”

Year to date through mid-November 2021, the volume and nature of the securitization deals pursued by Flagstar — issuances backed by either jumbo loans or investment-properties — make sense considering Franco’s observations. Those trends also have helped to buoy private-label securitization volume overall in 2021, which is on pace to exceed the mark set in 2020.

Total private-label residential mortgage-backed securities (RMBS) issuance for 2021 through October stood at $134.8 billion, slightly ahead of 2020 issuance of $131.2 billion over the same period, according to the most recent data on RMBS issuance published by the Securities Industry and Financial Markets Association. The latest SIFMA report rerevised upward by a total of nearly $56 billion the RMBS issuance figures reported previously for May through June of this year. 

Over the final two months of last year, the SIFMA report shows RMBS issuance was $57.9 billion in November and $12.7 billion in December — for a 2020 year-end total of $201.8 billion.

John Levonick, CEO of Canopy, which, like SitusAMC, also provides due-diligence and quality control services for secondary mortgage-market transactions, sees the demand for nonagency mortgages originations and securitizations continuing to expand in 2022 beyond even deals backed by investment properties and jumbo loans.

Bill Shuey, director of securitization operations at Wipro Opus Risk Solutions, another secondary-market due-diligence firm, agreed that in 2021 the private-label market has grown due to a wealth of deals involving jumbo loans and investment properties. What comes next in the year ahead, however, is the mystery, he added — assuming rates rise as projected, and we move into a market driven by home purchases.

“What does that product look like and what is the market going to accept?” Shuey asked. “I think that’s the big question going into next year: What will people try to do in that purchase environment? What is the sweet spot going to be?”

Levonick thinks that sweet spot might involve a return to more nontraditional mortgage products “that we haven’t seen in five seven, 10 years — interest-only products, [mortgages] that fall outside the vanilla product offerings that the GSEs consume today.”

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