Over the past three days at the American Securitization Forum, I've sat in six sessions ranging from RMBS valuations to new securitization perspectives to housing finance reform to REO-to-Rental. Here's what is apparent to me - the RMBS market ain't “getting back to normal.” What you see right now is what you're gonna get.
Yes, there will be growth from the nine deals by two issuers in 2012. Yes, there is capital stacked up and ready to invest. Yes, banks are warehousing loans to issue in 2013 and 2014. All of this will happen. But if you expect the RMBS market to return to levels even close to their zenith in the mid-2000s, you're wasting your time.
Why? Well, here's what we know:
- Fannie, Freddie & FHA constitute 85% of the residential mortgage market. That’s not changing any time soon.
- The FHFA is building a new securitization platform for Fannie & Freddie loans, indicating a long term investment in these enterprises.
- The CFPB describes a clear 8-year role for Fannie & Freddie in the mortgage market, showing the government’s position on their involvement in the mortgage market.
- The CFPB articulates tighter standards on Higher Priced Mortgage Loans (HPMLs), which constituted only 1.2% of total originations in 2012 anyway
Even with QM/QRM rules articulated, the private market won't be offering risky loans to risk borrowers en masse - that's the fundamental role of FHA. And don't forget about Basel III, which places stringent capital requirements on banks for "Tier 2" mortgages - any non-traditional mortgage loans such as negative amortization, interest-only, and ARMs loans. With the recent MSR trades moving these assets from bank to non-bank entities, banks are showing their unwillingness to retain extra capital on their balance sheets. Providing non-traditional loans to mortgage borrowers would require the banks to do exactly that.
The private label deals issued since 2009 by Redwood and Credit Suisse are low LTV, strong borrower, pristine loans, leaving RMBS investors with two investment options:
- Agency RMBS issued by Fannie Mae, Freddie Mac, and Ginnie Mae.
- Super safe, low yield private label deals such as the recent Redwood & Credit Suisse deals.
We all know the mortgages that constituted the zenith of RMBS in years past. Those loans don't exist anymore, nor should they under the new regulatory regime with the "ability to repay"/QM/QRM rules. A slide during the "2013 Securitization Market Outlook" panel yesterday ranked the ABS opportunities for 2013. From a relative perspective, non-agency RMBS issuances are on par with equipment RMBS…
Some investors understand this, explaining the rise of securitizations and trading in related residential assets like REO-to-Rental, Excess Servicing IOs, Servicer Advances, and Mortgage Servicing Rights.
Plus, additional opportunities are abound outside of residential housing:
- CMBS: A red-hot market in recent years and continuing to grow, and an asset class where investors can dig into every asset comprising the security’s cash flow.
- Auto ABS: At it's highest levels since 2006, with pent up consumer demand providing a clear pipeline for new assets to securitize.
- Credit Card ABS: Capital One just issued a $750 million ABS last week. This single issue is roughly 20% of the entire RMBS private-label market in 2012.
- Student Loan ABS: If you want exposure to a risky asset, go ahead and bet on the Gen Y's leaving college $100k in debt and moving back in with their parents.
- Collateralized Loan Obligations (CLOs): An asset class that could hit $70 billion this year according to American Banker - that's 4-5x the estimated size of the RMBS market. If you want to be on the recovery, why not bet on the companies building and producing, not the mortgage consumers at the end of the economic chain.
I’ve attended the ASF for five years now. I’ve watched attitudes on RMBS move from “dire” to “hopeful” and now to “optimistic.” While the RMBS outlook is as positive as it’s been in many years, and for good reason as home prices and the economy strengthen, the market framework we now live in simply dampens the case for “getting the RMBS back to normal.”
We’re already at normal. Get used to it.
Scott Sambucci works with CoreLogic Advisroy Services, the opinions expressed here are his own.