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Loan quality lessons learned from 2020

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Mortgage

Private-label MBS reaches 12-year high, sans NINJAs

Non-Agency MBS volume this year is at the highest level since 2007

The private-label mortgage-backed securities market is having its biggest year since 2007 as lenders including JPMorgan Chase, Caliber and Angel Oak try to take on behemoths Fannie Mae and Freddie Mac.

In the first nine months of 2019, non-agency MBS totaled $32.2 billion, according to a tally by Inside Mortgage Finance. That’s 12% higher than the all-year volume of $28.8 billion in 2018. It’s the most since $649.4 billion in 2007, prior to the collapse of the U.S. mortgage market.

The private bonds are a mix of qualified mortgages that meet strict standards as well as non-QM home loans that are close cousins. For example, JPMorgan Chase in April issued a bond containing more than $400 million of mortgages including jumbo loans underwritten with tax transcripts rather than signed tax returns.

Private-label MBS issuance for all of 2019 probably will end up being about $40 billion, said Keith Gumbinger, vice president of HSH.com, a mortgage data firm.

“Lenders and investors are becoming more comfortable moving into these areas where there are still a lot of underserved clients,” Gumbinger said. “There’s an audience right now for what you might call near-prime mortgages, and lenders are looking to meet those folks at the margins a little bit.”

The private-label market is reaching a 12-year high after almost disappearing following the 2008 subprime mortgage crisis sparked by bonds stuffed with risky products such as NINJA loans – mortgages given to borrowers with no income, job or asset verification.

In the old days, there was also a product called an “exploding ARM,” an adjustable-rate loan with a rock-bottom teaser rate that could quadruple after an initial period that typically was two years.

New mortgage regulations keep many of the riskiest types of loans from being originated today, Gumbinger said.

The “Ability to Repay” rule now requires lenders to confirm borrowers can meet their mortgage obligations for a five-year period from the origination date. It applies to both QM and non-QM loans. 

However, it’s up to lenders to decide what type of documentation they accept from borrowers if they aren’t going for the QM designation, he said. If loans aren’t QM, lenders lose their so-called safe harbor protection and take on more legal liability for loans that go bad, he said.

“Hopefully we’ve learned some of our lessons – lessons that will keep us from going down the slippery slope,” Gumbinger said. “For the most part, folks don’t want to own or hold that risk, so it’s a self-reinforcing limit.”

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