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Private-label market pushes back the pandemic blues

Securitized residential mortgage pools are performing well, new report shows

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The performance of loan pools backing private-label securitization deals has continued to improve across most measurement metrics through the end of January after hitting a low point in mid-2020 at the height of the pandemic.

The most recent RMBS Credit Indices report from the Kroll Bond Rating Agency (KBRA) shows that loan pools supporting outstanding private-label residential mortgage-backed securities issuances overall are performing relatively well to date in both the prime and nonprime markets. Through the end of January, the report shows, loan-delinquencies, net losses, and prepayments all were trending downward since the pandemic’s peak in 2020— with loan modifications recording more recent improvement. 

The return to investors, measured via the weighted average coupon, has experienced a slight haircut in recent months, however, attributable to newer, lower-rate mortgages being rolled into the running average. 

The KBRA January report includes analysis from 335 outstanding prime transactions valued in total at $54.6 billion and 134 nonprime transactions valued at $22.9 billion. In addition, the rolling indices include data stretching back to the fall of 2016, which represents the time frame for the comparisons in the analysis.

“In short, borrowers across [RMBS] asset classes have returned to pre-COVID levels of delinquency — a level of performance that is commensurate with the relatively tight credit standards in place at origination and the favorable interest-rate and home-price regime that has existed for the past decade,” said Jack Kahan, KBRA’s senior managing director of RMBS. “With mortgage rates increasing [recently], prepayments on prime loans are retreating quickly from their highs.”

Prepayments in the prime category reached the mid-40% to 60% range between October 2020 and July of 2021. Since late summer 2021, however, the nonprime prepayment rate has declined steadily — down to at 22.5% as of January of this year. In the nonprime sector, prepayment rates have declined as well, from the mid-40% range this past summer to the low 40% range starting in the fourth quarter of last year­ — ending January of this year at 41.6%.

Loan delinquency rates for prime RMBS issuance, which includes prime jumbo loans, is also in retreat.

  • Early-stage delinquency rates (loans 30-59 days past due) receded from a high of 5.4% in mid-2020 to 0.9% as of January 2022.
  • Mid-stage delinquency rates (loans 60-89 days past due) likewise have dropped — from a high of 4.3% in July 2020 to 0.6% as of January of this year.
  • Late-stage delinquency rates (mortgages delinquent 90 days or more) also are down, from a high of 3% in September 2020 to 0.6% as of January 2021.

For nonprime issuance — which includes alternative-documentation loans to the self-employed, real estate investors as well as credit-challenged borrows — the pattern is the same, even if the delinquency rates are higher due to the riskier nature of the loans.

  • Early-stage delinquency rates declined from a high of 23% in June 2020 to 5.5% as of January 2022.
  • Mid-stage delinquency rates declined from a high of 17.5% in July 2020 to 3.5% as of last month.
  • And late-stage delinquency rates have plummeted from 13% in August 2020 to 2.9% in January 2022.

Loan modifications are a trailing metric relative to delinquencies and that is reflected in the data as well, with modifications across both prime and nonprime sectors reaching high points in the summer and fall of 2021 — 3.7% for prime issuance in July and 9% for nonprime issuance in October. As of January, the loan-modification rate had declined to 2.2% for prime and 7.1% for nonprime.

Annualized net losses for prime issuance stood at 0.0197% as of January 2022 while nonprime issuance recorded a January rate of 0.0339%. This figure is a bit more volatile, with the prime net loss figure hitting a high of 0.1515% as recently as October of last year and the nonprime mark reaching 0.2025% in July 2021. For both prime and nonprime issuance, however, the figure has been trending downward in recent months.

“The annualized net loss rate represents the amount of losses the deal would incur in one year if every month of that year had the same amount of loss as the observation month.” Kahan said. “Historically this would be loans liquidated via foreclosure if the property sale price was unable to cover the outstanding loan plus costs. 

“Currently, most reported losses are on loans that are still outstanding and likely represent the amount reimbursed to the related servicer with respect to P&I [principal and interest] advances made by the servicer on behalf of the borrower while the borrower was delinquent.”

As far as the bottom line, the returns, measured as the weighted average coupon (WAC), the KBRA report shows a decline across issuance in prime and nonprime deals in recent months — compared to rolling averages dating back to 2016. The WAC stood at 3.4% in January of this year for prime deals and 5.9% for nonprime. By comparison, in a far different mortgage environment in the fall of 2016, the prime WAC reached a high of 4.8% and the nonprime WAC hit 7.6%.

“Rates bottomed out in early 2021 and remained near 3% much of the year,” Kahan said. “So, every new deal issued and added to the index was decreasing the WAC, and so many new deals were added in 2021 that this was reflected in the average.”

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