One big story at ABS Vegas this week was that our industry is finally getting closer to agreeing on the long-awaited, much-discussed concept of a deal agent. The need for this new role is one of the reasons usually cited for the continued lack of investor interest in private label residential mortgage-backed securities (RMBS).
On Monday, a Treasury-led group unveiled the overall framework of what the core principles and possible responsibilities of a deal agent could be. There are still some important details to be worked out regarding the scope and structure of the deal agent’s responsibilities: should the scope of duties be narrowly defined or open-ended? Is the deal agent a legal fiduciary? Despite these pending specifics, the broad strokes seem to be coming into focus.
What remains less clear, however, is when there will be a RMBS that will make sense for a deal agent (the lack of RMBS deals in the market was a frequent lament at the conference), how the deal agent will be paid (a real concern given the already high-cost of securitization), and whether/how the rating agencies will adjust credit enhancement levels.
In the first panel session on day three of the conference, Eric Kaplan, managing partner of structured finance at Ranieri Strategies, summed up the state of private label RMBS by saying: “There is virtually no product because of market dynamics.”
The main reason why we’re not seeing new private-label mortgage deals, at the moment, is that the economics of private-label securitization simply don’t work in the current low-rate environment. Prime jumbo securitizations, once the engine of post-crash RMBS issuance, have slowed significantly. In 2015, for example, Kroll said 38 prime jumbo deals came to market, but in 2016, year to date, that number (by my count) is two.
An even more disturbing development: some of the leading issuers, like Redwood Trust, have not been in the market with deals.
Most observers expect that non-QM deals will be prime candidates for deal agents, since they will have higher yields, higher risk borrowers and greater potential for defaults. While there is growing appetite for non-QM, and rumors that the first rated non-QM deal could debut later this year, no one is expecting a significant increase in new issuance in the near future.
The continuing lack of clarity over the new TILA-RESPA Integrated Disclosure rule (TRID) certainly isn’t helping the securitization situation, despite recent assurances from the Consumer Financial Protection Bureau (CFPB) that it will be looking at the spirit of law and won’t be focusing on minor miscues, at least initially.
But this, of course, is not codified in the regulation. Adding to the challenge, the rating agencies have yet to provide clear, consistent criteria defining “materiality” as far as TRID defects are concerned. This has left issuers and their third-party reviewers in limbo — creating delays in purchase decisions and adding to the list of reasons not to securitize.
“TRID-lock is what has happened to securitization,” according to Bob Magee, chief investment officer of Shellpoint Partners. He said that more than 95% of the loans that his group is looking at have TRID defects, often minor, and that there is “active debate among law firms” as to whether these defects can be corrected. As a result, he said between $400 million and $500 million in closed loans are “tainted” with some kind of defect.
On the “RMBS Due Diligence and Disclosure Standards” panel on which I participated, Diane Wold, managing director of Two Harbors Investment Corp., described the “headwinds” that TRID is creating. She said that, today, due diligence reviews are now coming back in upwards of five days, as the TRID review alone is taking six hours. It’s not unusual, she said, to see a review come back with 30 conditions with TRID or for different diligence firms to produce different results on the same TRID issues.
As a result, she suggested investors expect that the increased cost of performing these reviews will be reflected in the pricing going back to originators and this, most likely, will be passed on to borrowers.
SFR deals take a “pause”
For the past three years, the single-family rental (SFR) market has been a steady generator of new issuance, even as the mortgage market has struggled to re-start. More than 24 SFR deals, valued at $15 billion, have come to market in that period. But this year, there has been only one deal thus far.
On Tuesday, Mark Michael, managing director at Bank of America Merrill Lynch, said that SFR is being lumped in with all the other asset classes that are experiencing wider spreads. Chris Hoeffel, chief financial officer of Colony American Finance, added the “widening doesn’t have anything to do with performance,” though he acknowledged that there is some concern about liquidity among structured finance products in general.
Several of the participants noted that credit quality remains high and that only three of the properties contained in last year’s multi-borrower deals have gone into default. According to Brian Grow, managing director of RMBS at Morningstar Credit Ratings, the asset class continues to be very attractive: rents keep rising and credit is not a concern. He said, “there are a lot of new people interested in the category… a lot of buzz. But not a lot of deal flow.”
Hoeffel said that he believed volume of issuance this year will now most likely be lower than last year’s forecasts.
NPL/RPL stays robust
The non-performing and re-performing market continued to be a bright spot in 2015 and are expected to stay strong throughout this year. Phillip Thigpen, director at PWC, said he expects the total market — banks and government mortgage agencies — to bring more than $35 billion in new deals to market this year.
Although the overall inventory of distressed assets continues to decline, there is still a significant number of legacy defaults in portfolios, particularly properties in judicial states. Panelists on Monday’s “NPL/RPL Investing” session said that they are starting to see pools with longer defaults and more challenging properties.
So, while in the meetings I attended there was some obvious frustration about TRID and the slow progress on the private label and non-QM markets, there was significant interest in exploring new asset classes and ways of operating that reflected optimism as well. There was a sense that key pieces, like the deal agent, are falling into place, and the industry will be ready when market conditions change.