The PLS market hits a bump in the road

Market experts agree it’s a challenging rate environment, but remain confident the market will rebound this year

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The rate volatility that has gripped the economy since the start of the year and caused the mortgage-origination market to stumble is taking a toll on the private-label securitization market as well. 

Fast rising rates — the 30-year fixed rate is up nearly a point-and-half since the start of the year — have blunted mortgage originations, particularly refinancing, and by extension the loan volume available for securitization pipelines.

Although it’s still too early to know for sure how second-quarter performance for the private label securities (PLS) space will pan out, the market is currently under pressure, according to industry experts.

MAXEX, an Atlanta-based digital mortgage exchange serving the PLS market, posted record growth in 2021, for example. In a recent letter sent to its customers, however, MAXEX indicated that it will be taking actions to address waning loan volume. That includes trimming its workforce. 

“The company recently completed a minor reduction of its workforce consistent with staff reductions occurring across the mortgage industry in response to loan volumes declining,” the letter states. “MAXEX does not expect this will impact its operations, and no additional staff reductions are anticipated.”

MAXEX — in which J.P. Morgan is a significant investor — declined to comment on how many employees were let go at the company. MAXEX officials also did not disclose the company’s total workforce count — although its LinkedIn account shows that it has fewer than 150 employees. 

Clearly, a small reduction in headcount at MAXEX is not a game changer in a mortgage industry that employs 130,000 by some estimates, but it’s significant that the loan-trading platform is pairing back its workforce at all.

“MAXEX experienced record growth in 2021, with year-over-year revenue increasing over five times and the number of exchange participants more than doubling,” the company states in the letter to its customers. The MAXEX exchange now supports some 300 loan originators/sellers and more than 20 active loan buyers.

The recent downsizing news from MAXEX also comes on the heels of a strong first-quarter showing for the PLS market overall, compared with the same period in 2021. Over the first three months of this year, some 60 PLS offerings valued at $31 billion hit the market, compared with 35 PLS deals valued at $14 billion over the same period in 2021, according to deals tracked by the Kroll Bond Rating Agency — and the rating firm’s net doesn’t even capture all the PLS transactions over the period.

Like last year, J.P Morgan, through its private label conduit, J.P. Morgan Mortgage Trust, continues to be the 800-pound gorilla in the PLS market, accounting for about 20 percent of the market by volume year to date as of March 30, 2022. The investment bank side of New York-based banking holding company J.P. Morgan Chase & Co., sponsored seven private-label securitization deals over the first three months of this year collectively valued at $6.5 billion. That includes a $2 billion PLS offering in January, a $1.2 billion deal in February and $1 billion transaction in March. J.P. Morgan’s PLS offerings include three deals backed by investment properties and four backed by jumbo loans.

A good share of the first-quarter PLS deals, however, involved lower-rate loans from 2021, many of them refinanced loans, that finally made their way into transactions as the new year started. Once that reservoir of loans is depleted, it will be replenished by newer loans at much higher rates. 

The problem, for now, is that mortgage originations are way down on the refinancing front and purchase-loan volume is essentially flat — a byproduct, in large measure, of the volatile rate environment and tight housing inventory.

“Refinance application volume is now 60 percent below last year’s levels, in line with MBA’s forecast for 2022,” said Mortgage Bankers Association Chief Economist Mike Fratantoni in a public statement released earlier this week. “Even with the ongoing climb in rates, purchase application volumes were little changed last week. 

“This is particularly auspicious, as we are now in the beginning of the spring homebuying season, and those shopping for homes are struggling with not only higher and more volatile mortgage rates, but also an ongoing shortage of homes on the market.”

The private-label securitization market ultimately mirrors, in part, mortgage production trends in the origination market, and the current trend line is marked by uncertainty, volatility and lower production levels.

David Pelka, head of RMBS business and a principle with Minneapolis-based CarVal Investors, which is active in both the residential whole loan and RMBS markets, said it’s difficult currently to forecast with any certainty where the light is at the end of the tunnel that the PLS market now finds itself traversing.

“Mortgage volumes overall will be under pressure as long as rates are high, increasing and/or volatile,” he said. “…It’s currently quite difficult to see material certainty in new production volumes at higher rates (e.g., borrower demand) as well as corresponding securitization execution.”

John Toohig, managing director of whole loan trading at Raymond James in Memphis, explains the situation this way:

“Yesterday’s paper [at lower rates] is underwater … [but] the new loans that are coming on now are starting to be better priced [at higher rates],” he said. “When you have 100 basis point move [or more] in three or four months, it is hard for that pipeline to kind of catch up.

Toohig added that from the point of view of a nonbank lender that doesn’t hold deposits and hasn’t hedged properly, the recent run-up in interest rates and accompanying market contraction offers few good choices.

“They can’t just park the loans on the balance sheet because they have a warehouse line, and that warehouse is aging, and they have to sell those loans at some point,” he said. “And that’s what’s pushing through the securitization system at the moment, … and those loans are now worth 95 [cents on the dollar]. 

“They’re trying to find the best way they can get out of them that’s possible.”

In other words, the PLS market into March of this year was still digesting a large volume of lower-rate PLS deals that, in many cases, lost value and became harder to execute as rates spiked. Still, industry experts who spoke with HousingWire about the current market conundrum expressed confidence that the market will right itself once a rate plateau is reached and newer PLS deals backed by higher-rate loans flow into the market.

Toohig said he, too, is confident that “we will start seeing prices normalize as [new mortgages are originated] at today’s current rates in the market.”

“It’s going to take some time, however,” he added. “That’s why you’re starting to see the layoffs [in the industry] and that’s also because [overall mortgage] production has slowed down [too]. It’s a very fluid situation.”

MAXEX is making a bet on the future as well. The company recently completed a series C preferred equity offering that was co-led by its existing institutional investors. The capital raised, the company said, will be used to expand the MAXEX platform, including its loan programs.

“The current disruption in the mortgage market due to rising interest rates, rapidly decreasing volumes and economic uncertainty has created a unique opportunity for MAXEX to serve the growing needs of lenders and investors by providing a broader range of loan products while helping them reduce infrastructure and costs,” MAXEX CEO Tom Pearce states in the letter to the company’s customers.

Andy Payment, head of marketing at MAXEX, said the company is not disclosing the terms of the recent equity offering. Payment did say MAXEX is continuing to pursue an expansion of its sales force, which the company announced this past December. 

“While we expect that expansion to slow somewhat given current market conditions, we remain committed to building a world class sales organization to serve our rapidly-growing user network,” Payment said.

In addition, he said MAXEX plans to expand its non-QM program offerings and services, “both through the traditional exchange as well as through our platform-as-a-service offering that leverages our infrastructure — multiple sellers to a single institutional investor.”  

The non-QM market, which tends to do well in a purchase-market cycle, is focused on serving borrowers who don’t hold traditional payroll jobs or otherwise don’t qualify for mortgages inside the agency box. Those borrowers include the growing numbers of self-employed gig workers as well as real estate investors, foreign buyers, business owners and individuals with credit blemishes.

“There are a number of factors facing the current market,” MAXEX’s letter to its customers states. “However, MAXEX is bullish on the long-term growth of the industry and our increasing relevance to market participants.”

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