In a report on global consumer debt published last week, S&P said that government lending, depository institutions and insurance companies have picked up loan market share without having to access the securitization market, given the surge in consumer debt in the wake of the last recession.
“The US alone accounted for almost half of global consumer debt growth, recently peaking at $14.8tr in first quarter 2017, representing a 10 year increase of $1.4tr from first quarter 2007,” wrote the analysts, adding that low interest rates have been a major driver behind the increase in outstanding consumer debt.
The analysts also noted that despite the growth in consumer debt volume, only a small portion of the total outstanding amount of consumer debt has been securitized in recent years. ABS represented just 18% of $1.093tr total auto loans outstanding and 13% of $987bn for total credit card debt outstanding in the second quarter of 2017.
“Securitization utilization is at record lows for almost every consumer loan product. Recently originators have started increasing securitization for shorter-term consumer loans, such as autos and credit cards, indicating that they may be becoming more concerned about the risks of rising rates,” wrote the analysts.
Auto ABS players have said that while deep subprime issuers might find cheap funding in the securitization market, larger prime auto companies — especially those with an investment grade rating — have more financing options beyond ABS available to them, such as issuing in the corporate debt market.
They also added that the percentage of securitizations backed by deep subprime auto loans — particularly those backed by loans with FICO scores below 550 will increase — driven by a pullback from by auto players from the securitization market.
An increase in deals backed by shorter-term consumer loans could be popular with yield-hungry investors. Sources speaking with GlobalCapital pointed out that investors are showing an increased appetite for the subordinate notes of recent marketplace loan consumer ABS deals, given that buyers are more willing to take on risk with short-dated paper.
Despite promises of higher yield, investors are still taking a cautious approach to the market.
“We don’t expect deal performance to fall off, but at the same time we’re also being mindful of underwriters and originators because it does feel like at this point, everyone is trying to build volume and they keep having to dig deeper,” said a consumer ABS investor.
Mortgage backed deal flow slows
Mortgage securitizations are following the same trend as the wider consumer loan market. Non-agency RMBS represented just 8% of the $10.4tr overall mortgage market as of the second quarter of 2017. Residential loans held at depository institutions, and residential loans held at Government Sponsored Enterprises (GSEs), including agency loan pools, comprise 24% and 62% of the total amount outstanding, respectively.
“Securitization for longer-duration residential and commercial mortgages has not increased as those markets have continued to struggle with the securitization challenge of risk retention for longer-term mortgages,” wrote the analysts. “Thus, most non-government-sponsored agency mortgage originations have been held by banks or private lenders,” they added.
On the agency side, analysts from JP Morgan say that bank demand will continue to sustain the sector, especially with the US Federal Reserve looking to trim its balance sheet and shed the huge amount of agency MBS and US Treasury bonds it has accumulated since the financial crisis. According to JP Morgan data, banks purchased $175bn worth of mortgages in 2016, accounting for “more than half” of the agency mortgage supply.
“As investors look ahead to 2018 when the Fed’s System Open Market Account (SOMA) portfolio shrinkage steps up, the focus will be on US banks again. By our estimate, the Fed’s portfolio run-off will likely add an additional $165bn mortgages on top of the $200bn-$250bn of expected net supply. Of this almost $400bn that needs to be absorbed by investors, banks should play a prominent role,” they added.