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Private-label RMBS market has cause to celebrate

Securitization volume in the non-agency market soared in 2021

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As 2021 draws to a close, it’s clear that the private-label residential mortgage-backed securities (RMBS) market has notched a year for the record books.

For the full year, the RMBS 2.0 market — defined as all post-financial-crisis prime, non-prime and credit-risk transfer (CRT) transactions — is projected to exceed $115 billion in issuance. That’s more than twice the volume recorded in 2020 and nearly double 2019’s $60 billion mark as well, according to a recent forecast from the Kroll Bond Rating Agency (KBRA).

“Low mortgage rates, stable collateral performance and comparatively favorable spreads for much of the year showed a strong level of investor demand in RMBS paper, making 2021 the record post-global-financial-crisis issuance year,” the KBRA forecast states.

The major driver of private-label issuance this year has been the jumbo-loan market. RMBS offerings backed by jumbo loans are projected to reach the $60 billion level for 2021, according to estimates by Redwood Trust, a sponsor of multiple private-label offerings through its Sequoia securitization program.

The value of transactions backed by investment properties, including second homes, stood at nearly $23 billion as of the end of November, according to data from KBRA and digital-mortgage exchange MAXEX.

Securitizations in the non-QM market are projected to reach $25 billion in 2021, according to estimates from Dane Smith, president of Verus Mortgage Capital, and Tom Hutchens, executive vice president of production at Angel Oak Mortgage Solutions.

Non-QM mortgages include loans that cannot command a government, or “agency,” stamp through Fannie Mae or Freddie Mac. Non-QM loans typically make use of alternative-income documentation because borrowers cannot rely on conventional payroll records or otherwise fall outside agency credit guidelines. The pool of non-QM borrowers includes real estate investors, property flippers, foreign nationals, business owners and the self-employed, as well as a smaller group of homebuyers facing credit challenges, such as past bankruptcies. 

On the CRT front, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac recorded a combined issuance through mid-December of nearly $18 billion, according to GSE transaction records. Through a CRT transaction, private investors participate with Fannie and Freddie in sharing a portion of the mortgage credit risk in the reference loan pools retained by the GSEs. 

Despite the outsized performance of the private-label market in 2021, compared to the prior post-crisis years, the so-called non-agency sector remains well below the level of market dominance it commanded in 2005 and 2006 — just prior to the housing-industry crash. At that time, it represented nearly 60% of RMBS issuance across agency and non-agency lines. 

“The non-agency share of mortgage securitizations increased gradually over the post-crisis years, from 1.83% in 2012 to 5% in 2019,” a recent Urban Institute report states. “In 2020, the non-agency share dropped to 2.44%, and as of September 2021, it stood at 3.79%.”

The Urban Institute report, produced by its Housing Finance Policy Center, notes that the steep decline in private-label activity in 2020 — as a share of the entire securitization market — was due, in part, to expanded agency refinancing activity as well as “less non-agency production due to dislocations caused by COVID-19.”

“The [private-label] market is recovering in 2021, although the share remains lower than 2019,” the report notes. “While the share is lower, as [GSE] securitization volume is high due to refi activity, this is the largest year of non-agency securitization since 2008.”

The 800-pound gorilla in the private-label space in 2021, as reported previously by HousingWire, is J.P. Morgan, the investment bank side of New York-based banking holding company JPMorgan Chase & Co.  

J.P. Morgan, via its private label conduit, J.P. Morgan Mortgage Trust, through mid-December had sponsored 15 offerings backed by jumbo loans with a total value of $16.4 billion and eight investment-property/second home-backed securitization deals valued at $3.9 billion, according to bond-rating agency reports. The combined value of those private-label transactions, $20.3 billion, represents nearly 18% of KBRA’s projected $115 billion in deal volume for the entire private-label market this year.

For J.P. Morgan’s jumbo-loan securitizations, bond-rating agency reports show that nearly 50% of the mortgages involved in those deals were originated in California.

“California has by far the highest prices in the country, with the median price of a home today in the state over $800,000,” said Rick Sharga, executive vice president of marketing for real-estate research firm RealtyTrac. “And, so that prices most borrowers out of getting a conventional loan, even with the higher [GSE loan-limit] allowance. 

“So, you’re going to have a higher percentage of jumbo loans in California … and California also has a high percentage of overall sales relative to other states.”

Adds Tom Piercy, managing director of Denver-based Incenter Mortgage Advisors: “The jumbo market has expanded as we’ve seen property values increase nationwide. … The appetite for jumbo loans has increased significantly.”

Rising interest rates, coupled with increased agency loan limits and the Federal Housing Finance Agency’s decision to suspend the cap on the purchase of mortgages backed by investment properties, however, are expected to slow the growth of the private-label market in the year ahead. 

The Federal Reserve is increasing the pace of its bond tapering in the months ahead, including reducing its purchases of mortgage-backed securities. It also is planning up to three bumps in the benchmark interest rate in the year ahead. That upward pressure on rates is expected to bend the arc upward on 30-year fixed rates as well, depressing the housing-refinance market.

“It is still expected that [jumbo] RMBS issuance will start to slow in the coming months as rates rise and supply wanes,” states MAXEX’s December market report. “…We continue to think that issuance [of RMBS backed by investment properties also] will subside in 2022 as originators sell many of these loans back to the agencies.” 

Still, the non-agency market is expected to continue to expand in the year ahead, even if it’s at a slower pace than in 2021, according to KBRA.

“Our fiscal year 2022 forecast is $132 billion across the prime, non-prime, and CRT segments, which, if realized, would make it a new record year for RMBS issuance post-GFC [global financial crisis] and an approximately 15% year-over-year increase from 2021,” KBRA’s market-projection report states.

Rising rates, rising GSE loan limits, the suspension of GSE caps on the purchase of investment property mortgages, as well as a housing market that is shifting toward purchase loans, are in combination, then, expected to act as a governor on the growth of securitization volume in the year ahead. At least that may be the case for the jumbo and agency-eligible investment-property segments of the private label market.

But that rising-rate environment is expected to be a boon for the non-QM sector. Verus’ Smith projects that non-QM private-label issuance will swell to over $40 billion in 2022, approaching a doubling of this year’s already robust transaction volume.

“We believe the conditions are ripe for considerable growth of the expanded non-agency market,” Smith said. “Considerable unmet demand for mortgage financing exists from self-employed borrowers and real estate investors. 

“… We are also seeing considerable renewed interest from mortgage lenders who are looking to diversify their product mix away from conventional refinances.” 

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