New issuance in the private-label mortgage market remains spotty, totaling $5 billion in 2012. But with stable mortgage rates and continued improved underwriting, the economics of securitization is expected to improve, leading to higher issuance volumes in 2013, according to Credit Suisse (CS) 2013 outlook report.
However, high government-sponsored enterprise loans limits and strong bank bids for high-quality jumbo loans will keep new issue flows limited to between $10 billion and $15 billion in the new year.
This year, mortgage rates fell from March through September at 4% and 3.4%, respectively, according to Freddie Mac’s survey rate.
"This resulted in a much slower pace of loan accumulation as rate locks would often not materialize into funded loans. Additionally, as secondary rates fell, a lot of the securitization economics depended on the execution of the IO tranche," the report stated.
The Qualified Residential Mortgage definition will also need to be resolved for private-label mortgage securitizations to make further progress. Regulatory uncertainties related to risk retention and premium capture reserve account are specific factors delaying a solid definition.
The Consumer Finance Protection Bureau’s choice of how to define the Qualified Mortgage and Qualified Residential Mortgage standards is a key factor in the future of the mortgage-backed securitization market.
"The QRM definition must be significantly loose to include a meaningful percentage of the mortgage universe but sufficiently narrow that investors in QRM securitizations have confidence that the probability of default is fairly low under the new standards," the report said.
Origination is expected to pick up gradually and is unlikely to have any signification impact on potential securitization volumes next year, even if the definition resulted in a credit box that is wider than anticipated, analysts said.
The securitization market may see additional supply of loans from bank portfolios if rates sell off and banks become concerned about extension risk on their book of the loans, the report stated.
In a more practical sense, a GSE program to offload credit risk to private-label residential mortgage backed securitization market is expected to start in 2013, setting a benchmark for future g-fees.
By pushing up g-fees further based on where the market prices default risk. The non-agency market is expected to become "incrementally more competitive."
However, the process is expected to be long and gradual, with an impact developing over the long haul.