Why the private-label market will chill in 2022

The private-label market will finish 2021 on a strong note, but rising rates, soaring home prices and larger GSE loan limits are looming

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Securitizations backed by jumbo loans and mortgages on residential investment properties have propelled a rebounding private-label market in 2021. 

That gravy train, however, is expected to slow down some as we turn the corner into 2022 — with rising interest rates, spiking home prices and the expanding reach of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac serving as the brakes.

Still, the balance of the year looks promising for the private-label market, according to MAXEX. Loans traded through the Atlanta-based digital mortgage exchange have been included in 100 private-label securitization transactions since its launch in 2016, the company reports. 

MAXEX lays out its market prognostications in a recently released report covering private-label securitization activity for the month of October. And the elephant in the room is interest rates.

“We do expect the PLMBS [private-label mortgage-backed securities] market will downshift slightly as supply wanes while interest rates rise, creating a more competitive marketplace,” the MAXEX report states. 

For the jumbo-loan market, the report notes that October was a strong month, with seven securitization “deals pricing for more than $4.6 billion.” A jumbo loan is defined as a mortgage that exceeds the conforming loan amount making it eligible for purchase by Fannie Mae or Freddie Mac. 

“Rising rates will start to slow the supply of these [jumbo] loans, however,” the MAXEX report continues, “causing spreads to tighten further and issuances to slow.”

In fact, the seven securitization deals backed by jumbo loans in October represented a decrease from the 10 jumbo transactions completed in September, the MAXEX report states — noting that deal numbers for September were revised upward from the prior month’s report.

J.P. Morgan, which is an investor in MAXEX, “continues to price massive [jumbo-loan] securitizations in the private-label mortgage-backed securities space,” the MAXEX report said. Among the other jumbo-loan securitization issuers in October, according to the report, were Bank of America, Redwood Trust, Guaranteed Rate and Goldman Sachs.

J.P. Morgan, through its private label conduit, J.P. Morgan Mortgage Trust, so far this year has sponsored 13 private-label securitization offerings backed by jumbo loans valued at $13.8 billion. Those offerings, current through the end of October, involved a total of more than 14,000 jumbo mortgages, according to bond-rating agency presale reports. 

“We’re close to $44 billion in jumbo RMBS [private-label residential mortgage-backed securities issuances], which is more than double what we had last year,” said Greg Richardson, chief commercial officer at MAXEX, referring to the entire private-label market. “It was close to $5 billion last month, and it’s probably going to be somewhere in that neighborhood this month [for November].

“There is a lot of supply that’s coming to the market In November, and if that trend continues, we’re going to be easily north of $50 billion on the jumbo RMBS side [for the year].”

The surge in private-label transactions and deal volume in 2021 also has been propelled, in part, by changes in January to the preferred stock purchase agreements governing the GSEs — which are operated under conservatorship by the Federal Housing Finance Agency (FHFA). The key change was a cap placed on the GSEs’ acquisition of mortgages secured by second homes and investment properties. 

The amendments to the PSPA, however, were suspended in September of this year and are now under review by FHFA. In the coming months, the effect of the rollback of that cap is expected to be felt in the private-label market, according to MAXEX.

Ten RMBS deals backed by investment properties “were priced in the month of October for a total of $5.4 billion,” the MAXEX report states. “That is approximately $2.3 billion higher than September as issuers work through loans sold prior to the removal of the FHFA cap in September. 

“As we move forward in the coming months, we expect to see this volume fall off as originators sell the majority of agency-eligible NOO [mortgages on nonowner-occupied homes] to Fannie Mae and Freddie Mac.”

Among the major dealmakers in the residential investment-property securitization space in October, according to the MAXEX report, were UWM, J.P. Morgan, Flagstar Bank and Goldman Sachs.

Another pending change involving the GSEs also is in the works and is expected to shave additional volume off the private-label menu in the year ahead. Because of rising home prices, Fannie Mae and Freddie Mac are preparing to increase loan limits for 2022, with the limit for high-cost markets projected to approach the $1 million mark, up from $822,375 currently, according to a recent Wall Street Journal report.

“Higher securitization volumes have been aided by robust originations, but also the fact that home-price appreciation means that more loans are falling into a jumbo-loan category,” said Michael Franco, CEO of SitusAMC, which provides due-diligence services for private-label transactions. “But there are going to be changes to the conforming loan limits as a result of that [home-price appreciation].”

MAXEX CEO and co-founder Tom Pearce said home-price appreciation will continue to be a factor in the market for the foreseeable future. There is a severe imbalance currently between the supply of new homes and homebuyer demand, he explained. 

“Unless a new supply of homes comes online soon,” Pearce added, “the supply/demand dynamics could drive up housing prices further.”

Ed DeMarco, president of industry trade group the Housing Policy Council and acting director of the FHFA from 2009 to 2014, said the GSEs, backed directly by the taxpayers, continue to dominate the secondary market, even as housing prices continue to soar. And that is occurring in the context of the Federal Reserve signaling “a general expectation of rising interest rates … that will cool the refinancing market.”

“And so, you take these things together, and we think that we ought to be paying attention to risks in the marketplace,” DeMarco said. “I don’t want to overplay this, but I don’t want to underplay it. It’s an important thing for policymakers and regulators to be focused on.

“… One of the important things about Congress actually legislating on housing-finance reform is that it can set the parameters for the future, not just what is the government’s role, but where does that role end?”

That question applies squarely to the pending increase in GSE loan limits. A report by the Congressional Research Service on that very subject sets up the choices. It states that the case for raising the conforming loan limits is based partly on equity — ensuring that homeowners in high-cost areas of the country have the same opportunity to receive what amounts to a GSE subsidy in the form of lower interest rates as do homebuyers in lower-cost regions of the nation.

“A counter-argument is that the additional subsidy created by raising the loan limit would go overwhelmingly to mortgage holders with high incomes,” the CRS report adds. “If the purpose of the GSEs is to foster home ownership, the impact of raising the limit is likely to be minor: Those who would benefit from the change already have high homeownership rates.”

The CRS report points out that GSE participation in the mortgage market does not “reduce overall risk in the market,” but rather it simply shifts that risk to the taxpayers.

Regardless of market dynamics and where the line is eventually drawn between the GSEs’ domain and the private-label market, one thing is certain. Business will continue to get done, according to John Toohig, managing director of whole loan trading at Raymond James.

He said as rates inch upward, closer to 4%, creating challenges for more borrowers, then originators will be under pressure to find more volume outside of refinancing, which will slow, and the cookie-cutter conforming-loan space dominated by Freddie Mac and Fannie Mae.

“If rates continue to rise, then the question becomes: Where can you find more [loan] volume?” he asked. “As non-QM lending [loans not eligible for purchase by the GSEs] comes back, I think that will be a natural boost for private-label securitization.”

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