The residential mortgage-backed securities (RMBS) market took a beating in 2022, nearly stalling as the year came to an end — on the heels of interest rates jumping more than 3 percentage points over the first half of 2022.
That dramatic rate volatility wreaked havoc on spreads and RMBS deal execution — and created cash-flow challenges for many lenders that rely on securitization as a liquidity outlet. As we turn the corner into 2023, however, the landscape so far looks brighter for the RMBS market.
Though still a continuing factor, rate volatility so far this year has calmed considerably compared with last year’s huge rate surge. In addition, a major decline in mortgage originations — a byproduct of higher interest rates — has reduced overall RMBS supply, which market observers say provides a lift to even low-coupon securitization deals.
Those tailwinds in the RMBS market, also referred to as the private-label securities (PLS) market, are providing a boost to both prime jumbo and non-QM (or nonprime) issuance so far this year, market data shows.
“The securitizations that printed in January priced at meaningfully tighter spreads than we’ve seen in some time,” states a recent report from the loan-exchange platform MAXEX. “Improved securitization economics also allowed issuers to improve pricing significantly.
“…Three prime jumbo RMBS deals priced in January for a total volume of $1.15 billion. These were the first prime jumbo securitizations since October 2022 and [it was] the first multi-issuance month since June 2022.”
In addition, according to bond-rating reports, an additional three prime jumbo RMBS deals are in the works this month, as of Feb. 21, backed by loan pools valued in total at $1.1 billion.
Better days in non-QM
The non-QM side of the PLS market is off to an equally good start in 2023, relative to how it finished 2022. A review of available bond-rating reports shows that a total of 15 non-QM PLS deals were in the works as of Feb. 21, backed by loan collateral valued in total at nearly $6 billion. Those non-QM offerings include 13 securitizations involving a mix of owner-occupied and investment properties, plus two deals involving a mix of performing and nonperforming loan collateral.
MAXEX reports that non-QM securitizations (which it calls expanded credit) last year declined steadily month over month starting in late summer — that is until January of this year, which produced the highest total non-QM PLS issuance since August 2022.
“The way spreads and rates have moved incentivizes originators, particularly those who backlogged really low-coupon loans, to come through with deals,” said Ben Hunsaker, a portfolio manager focused on securitized credit for California-based Beach Point Capital Management. Hunsaker made his comments in an interview last month referring to the flurry of RMBS offerings in January.
“This gives some of the lenders with backlogs of those low-coupon loans an exit strategy, and it frees up capital for that origination ecosystem,” he added. “They’re probably not going to lose nearly as much money as they thought coming into the new year in terms of where they valued [those loans] on their books at the end of Q4, so it’s an unambiguous positive for them.
“And if you have the critical mass for a new deal with the prevailing coupons, let’s say at rates of 7% plus, you would be highly incentivized to issue those deals today because bond buyers love it.”
Keith Lind, CEO of California-based non-QM lender Acra Lending, stressed that even though market conditions overall appear to be headed toward improvement, that doesn’t mean all securitization deals are profitable for lenders even now. He said non-QM securitization deals in this rate environment still need to be in the “low 7% range to break even.”
For deals backed by loan collateral with coupons in the low 5% range, Lind said, “You’re likely talking about a 5-to-10-point loss, so you’re crystalizing a loss there.”
Lind stressed that Acra has stayed on the right end of that rate curve by raising its rates early and fast.
“We’re locking [loans at] about an 8.25% to 8.5% coupon today,” Lind said in a recent interview. “A year ago, we were at like a 4.75% coupon, and we were the first mover [on rates]. We took a lot of flak for that, but it was the right move.
“That preserved our year on our balance sheet, and we were actually profitable in 2022 because we were very decisive in taking rates up.”
Acra at this point does not securitize its own loans but rather sells them on the whole-loan market servicing-released. Some of those loans are purchased by aggregators that do securitize them along with loans from other lenders. Despite the continuing dour mortgage-origination environment and ongoing uncertainty over interest rates — as the Federal Reserve continues to inch up its benchmark rate to battle still-persistent inflation — Lind sees some prospects for optimism about the mortgage market in the year ahead.
“There’s more tailwinds looking forward into 2023 than headwinds for the non-QM market,” Lind added. “So, we’re fairly bullish moving forward.”
An analysis of bond-rating reports for 2023 PLS offerings in the works through Feb. 21 shows that for prime jumbo deals, the weighted average coupon (WAC) for the loan pools ranged between 3.8% to 5.9% — with the fresher collateral at the higher end of the range.
For the non-QM deals in the pipeline for 2023 through the same date, the WACs range from 4.87% to 8.7%, bond-rating reports show. Non-QM rates tend to be about 1.5 percentage points above the prevailing interest rate, in part because of the added risk the loans entail. As of Feb. 16, according to Freddie Mac, the interest rate for a 30-year-fixed mortgage stood at 6.32%.
A lighter RMBS pipeline
Although the PLS market appears to be getting its sea legs back so far in 2023 as fresher, higher-rate collateral is finally starting to hit the market, volume is still projected to be down significantly from 2022.
Kroll Bond Rating Agency (KBRA) in a PLS report released late last year forecast that overall PLS issuance in 2023 — which it defines as prime, nonprime and credit-risk transfer offerings — is expected to come in at about $61 billion, down 40% year-over-year. An analysis of PLS deals based on multiple bond-rating agency reports shows that this year, through Feb. 21, some 21 PLS deals are in the pipeline valued at about $8.2 billion. Over the same period in 2022, KBRA tracked a total of 31 PLS deals valued at $16.7. billion — an indication of just how much loan-origination volume is off between last year and this year.
That reduced RMBS supply, however, can be good for lenders still in a position to securitize loans.
“Volumes have significantly contracted, so all of a sudden there’s less secondary volume in general,” said Sean Banerjee, co-founder and CEO of ORSNN, a Seattle-based fintech start-up operates a cloud-based electronic whole-loan trading platform. “And when that happens, the coupons of yesterday that are below prevailing interest rates become more valuable because there’s a lack of origination volume, and banks and [other investors] still need earning assets.”
Agency mortgage-backed securities (MBS) volume also is down significantly for similar rate-driven reasons. Although the Federal Reserve’s reduced role since last year as a buyer of agency MBS mitigates the upward pricing pressure created by the supply reduction, given the Fed’s outsized role in recent years as a purchaser of agency MBS assets.
Another bright spot for the RMBS market, according to Mark Fontanilla, a consultant in global structured finance for rating agency DBRS Morningstar, is that significant home-price appreciation (HPA) remains embedded in existing loan collateral, even as home-price growth dips or declines in some regions.
“The most real recent [loan] vintages don’t have as much HPA upside at this point in the cycle versus seasoned deals, which have substantial built up HPA,” Fontanilla said during a recent webinar focused on the PLS market. “… As far as the significant home-price appreciation that’s inherent in almost every RMBS sector, however, that bodes well.
“Given the HPA built-up over the past couple of years,” he added, “there’s been more originator and borrower interest in this side of the market” in terms of the future potential for home-equity lending and related securitizations.
Roelof Slump, managing director of structured finance operational risk at Fitch Ratings, agrees that there is likely to be more activity in the year ahead with respect to securitizations backed by home-equity loans — second liens and HELOCs (home-equity lines of credit).
“Those borrowers who have 3% firsts [first mortgages] who are happy with their homes and happy with their mortgages at that rate may find over time there’s a need or opportunity to take advantage of home equity,” he said. “Does that mean there will be many large issuances?
“I’m not sure, but I think there’s going to be some of that activity. But traditional prime is not dead either, so I think it will be mixed [this year] in terms of the types of [deals] that the rating agencies and investors see, but I think it will be an interesting and multifaceted year.”
Slump hedged his forecast by adding that given the still uncertain mortgage-finance outlook, a quarter-by-quarter assessment is still necessary, “but I think the activity is good right now.”