Private-label market filled the void created by PSPA changes

Fannie and Freddie caps on purchasing investment-property mortgages fueled a surge in private-label securitizations in 2021

The pandemic, stellar vacation-home sales and regulatory turbulence combined in 2021 to spark a boom in private-label securitizations backed by mortgages on second homes and investment properties.

A total of 37 such deals were completed through October of this year involving more than 51,000 mortgages on properties that were not a primary residence (in other words, second homes and investment properties), according to HousingWire’s analysis of private-label securitization deals over the period. The mortgages used as collateral were valued in aggregate at $15.2 billion as of the closing of the transactions.

The mortgage-collateral volume and total deal count in 2021 dwarfs even the combined totals from the prior two years: 

  • 2020 — 12 deals involving 13,300 loans valued at $3.9 billion.
  • 2019 — 15 deals involving 17,492 mortgages valued at $5.4 billion.

The analysis is based on an examination of data supplied by the Kroll Bond Rating Agency covering more than 160 private-label residential mortgage-backed security (RMBS) issuances over the first 10 months of this year. 

The private-label securitization market operates independently of the goliath secondary market for mortgage securitization controlled by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Securities issued through the private-label market, unlike GSE securitizations, do not carry a government guarantee. 

The surge in private-label transactions and deal volume in 2021 has been propelled, in part, by changes in January by the Trump administration to the so-called Preferred Stock Purchase Agreements governing the GSEs — which are operated under conservatorship by the Federal Housing Finance Agency (FHFA). The key change in this case was a 7% 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 and are now under review by FHFA.

“They [the GSEs] are walking back some of the restrictions on second homes and investment properties, so I don’t know that we get as much of a boom in the private label market [going forward] as we’ve seen,” said John Toohig, managing director of whole loan trading at Raymond James.

Regardless of the pace of deals moving forward, Ed DeMarco, president of the Housing Policy Council, a trade association representing the industry’s leading mortgage originators and servicers, said the KBRA data on private-label deals year to date is impressive.

“I mean suddenly many of these [second-home and single-family investment property] loans could not be sold to Fannie and Freddie … and pretty quickly there developed a number of private securitizations,” said DeMarco, who served as acting director of FHFA from 2009 to 2014. “That tells me that the [private] market is fully capable of doing this, and willing to do it, but so long as Fannie and Freddie are also competing in that space, it’s very hard to compete [with them].”

The transaction data supplied by KBRA does not offer a breakdown of how many of the mortgages securitized this year in the private-label market involved second homes, or vacation properties, versus investment rental properties. Data from other sources, however, point to some trends that likely apply to the private-label transactions tracked by KBRA.

For one, the bulk of rental properties in the country, 85% or more, are owned by small players — investors with 10 or fewer properties, according to an April 2021 report prepared by Amherst Pierpont, an independent broker-dealer. 

“The largest institutional investors collectively have owned between 1% to 2% of all single-family rental properties [nationwide],” said Rick Sharga, executive vice president of marketing for the real-estate research firm RealtyTrac, a subsidiary of Attom Data Solutions. “And the mom-and-pop investors, the people who own between one and 10 properties, represent anywhere from 85% to 90% [of that market].”

The other data of interest is focused on the vacation-home market, according to Sharga.

“For me, what the [private-label transaction] data suggests is not a huge upswing in institutional investor activity, but rather a huge upswing in second-home buyer activity,” Sharga adds. “And we’ve seen NAR come out with some analysis of that.”

NAR, or the National Association of Realtors, in June published its Vacation Home Counties Report for 2021. The report indicates that vacation-home sales were up by 57.2% year over year from January through April of this year, compared with 20% year-over-year growth in existing-home sales over the same period. Vacation-home sales on a seasonally adjusted annualized basis averaged 412,500 over the first four months of this year.  

“Vacation home sales rose strongly in 2020 and in January-April 2021,” the NAR report states. “With no other major event happening since 2020 other than the pandemic, the rise in vacation home sales can be reasonably attributed to the demand for vacation homes with people able to work from home, students schooled virtually, and as the population sought safety and recreation away from urban areas.”

Drilling down into the KBRA data, another revelation surfaces. Of the 37 private-label deals involving second homes and investment properties tracked by KBRA through October of this year, three lenders accounted for 14, or nearly 40%, of those securitizations. 

United Wholesale Mortgage (UWM) sponsored two deals solo over the period, acting as the dealmaker via its securitization conduit while also originating 100% of the mortgages used as collateral for the securities issued in each offering. 

Investment bank J.P. Morgan, through its JP Morgan Mortgage Trust conduit, sponsored six securitizations collateralized by second homes and investment properties over the first 10 months of this year — with UWM acting as the leading originator for four of them. (Those four deals were independent of UWM’s solo securitizations.) In addition, Flagstar Bank sponsored six securitization deals backed by second homes and single-family investment properties over the first 10 months of this year through its conduit, Flagstar Mortgage Trust, KBRA data shows. The lender also served as the leading mortgage originator for those deals, supplying 100% of the mortgage collateral.

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