Rising mortgage rates could trigger more private label deals

Banks are sitting on a jumbo-mortgage stockpile that could propel the nonagency securitization market

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The private label securitization market so far this year has been dominated by mortgages originated primarily by nonbanks, but there is a growing pipeline of mortgages now held in bank portfolios that might provide a rocket-like boost to the nonagency market in the months ahead if interest rates continue to rise.

Market observers interviewed by HousingWire and industry data seem to support that premise, but only time will tell if that private-label rocket launch materializes. 

Over the first nine months of this year, it has been nonbanks that have supplied the bulk of the underlying mortgages for private label securitizations. An examination of nonagency residential mortgage-backed security (RMBS) transactions tracked by the Kroll Bond Rating Agency (KBRA) illustrates the nonbank dominance. 

So far this year, through mid-October, a depository bank served as the leading mortgage originator for a private label securitization in only 13 of 161 deals tracked by KBRA. Flagstar Bank was the leading originator in 10 of those transactions and Wells Fargo in three deals, while a nonbank was the leading originator in 148 of the nonagency RMBS transactions tracked by KBRA over the period. 

Even when the scope is broadened to the top three mortgage originators for private label transactions, banks participated in a total of only 19 of the 161 nonagency RMBS deals followed by KBRA. Nonbanks dominated the ranks of the top three originators in the balance of the private label deals over the period. Among the most active nonbanks this year have been Guaranteed Rate, loanDepot, Quicken Loans [now Rocket Mortgage]; Sprout Mortgage, CrossCountry Mortgage, Caliber Home Loans and United Wholesale Mortgage.

Beyond Flagstar and Wells Fargo, the only other banks that show up among the top three tiers in transaction participation, based on the KBRA data, are Metro City Bank, East West Bank, Northpointe Bank and Global Bank. None of the latter four served as the leading originator in a transaction.

So why are banks largely on the sidelines so far when it comes to supplying the mortgage collateral for private label securitizations? 

One investment banker who spoke with HousingWire said bank mortgage originations have been robust this year, particularly in the jumbo-loan space as home prices have risen. So far, he added, most of those loans are being retained on banks’ balance sheets. 

“Deposits are high, banks’ net interest margins are focused, and banks aren’t particularly large sellers [into the private label space],” the investment banker added.

Tom Piercy, managing director of Denver-based Incenter Mortgage Advisors, said banks have a regulatory concern to balance as well. “The jumbo market has expanded as we’ve seen property values increase nationwide,” Piercy said. “It’s difficult to quantify per se, but the appetite for jumbo loans has increased significantly. 

“A primary driver [for retaining loans on their books] are regulations requiring banks to have 5% capital [reserved] against all mortgage-backed securities holdings versus zero against holding whole loans.”

Evidence of the banks’ huge stockpile of jumbo loans — mortgages that exceed the FHFA’s conforming size limit for sale to Fannie Mae or Freddie Mac — is revealed in a recent tally by the industry publication Inside Mortgage Finance. The top five nonagency jumbo mortgage originators through the first six months of 2021 were all banks, the publication’s data shows. Collectively over that period, those five banks — Chase, Wells Fargo, Bank of America, First Republic Bank and U.S. Bank — originated a total of $110 billion in nonagency jumbo mortgage volume.

“Given the nature of these loans, and their low prepayment speed, the banks that have commented on this [jumbo loans] have suggested putting them in portfolio is a no brainer,” said Paul Yarbrough, director of client success at San Diego-based Mortgage Capital Trading Inc.

The outsized role played by nonbanks in supplying the mortgage collateral for nonagency RMBS offerings, however, may need amplification from the bank side going forward to spur more growth in the private label market — which so far this year is trailing last year’s securitization pace, according to data published by SIFMA (the Securities Industry and Financial Markets Association).

SIFMA is a trade association representing broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. It also tracks U.S. mortgage-backed security issuance and produces a tally of the results.

SIFMA data shows that nonagency RMBS issuance got off to a fast start in the first quarter of this year, reaching nearly $50 billion in securitized loan volume — nearly double the first-quarter 2020 mark of $28.5 billion. The second and third quarters of 2021, however, failed to keep pace with the prior year’s issuance. 

Consequently, year to date through the third quarter of this year, the SIFMA scorecard shows issuance is down in the nonagency space, at $74.4 billion, compared with $92.5 billion over the same period in 2020.

Still, much of the fourth quarter is ahead of us at this point, which last year proved to be the biggest quarter for both agency and nonagency RMBS issuance — nearly $1.1 trillion on the agency side and slightly more than $109 billion on the nonagency side, according to SIMFA’s tally. The fourth quarter of this year, and beyond, then, is where the jumbo loan volume now locked up in the portfolios of banks could potentially play a bigger role in boosting securitizations in the nonagency space. 

“We’ve seen and been told that more high-balance loans [jumbos] are being put into [banks’] portfolios,” said Justin Grant, director of investor services Mortgage Capital Trading. “That’s usually an appetite thing.”

One executive in the loan-trading market who spoke with HousingWire said banks that hold lower rate mortgages in portfolio too long could face another market force that might cause them to reassess their strategy. And that is the potential risk of getting trapped in a rate-spread squeeze on those loans as interest rates rise, causing banks’ cost of deposits to jump. 

That risk, once it becomes prevalent, could lead to an appetite change and an incentive for banks to push more mortgages into the private-label securitization pipeline. “Interest rates were near a bottom at 3%,” the executive said. “What happens when rates go to 4%? 

“The only way to get rid of those [lower rate] loans then [short of securitizing them],” he added, “might be to sell them at 95 cents on the dollar.”

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