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RMBS revs up as reforms loom


While the outlook for a long-awaited reform of mortgage finance and the government-sponsored enterprises is uncertain in an election year, non-agency residential mortgage-backed securities (RMBS) are clawing their way back into US capital markets

In July the Consumer Financial Protection Bureau (CFPB) announced that it will allow the so-called ‘QM patch’ to expire in January 2021. This will affect the RMBS market regardless of mortgage finance reform’s slow progress. 

The patch created an exemption for Fannie Mae and Freddie Mac from the CFPB’s ‘ability to repay’ rule. This stipulates that lenders verify certain criteria before originating loans. Allowing the GSEs to ignore parts of the qualified mortgages criteria when purchasing loans to package into MBS has given them a $260bn opportunity, equivalent to 16% of all new mortgages annually, since the patch was introduced in January 2014.

Now, with the patch’s end looming, sentiment is a mix of excitement at the potential opportunity for private capital and fear of potential unintended consequences. While lenders are hungrily eyeing the $260bn hole in the market that will need to be filled, there are potentially negative consequences to eliminating the patch altogether. 

In particular, this might allow many borrowers who would not have otherwise qualified for a mortgage to obtain one. The fear is a return to pre-crisis indiscriminate lending. 

There are also questions around investors’ ability to absorb the inevitable surge of new private label RMBS supply. “Unlike GSE reform, the end of the QM patch is a done deal,” says the head of mortgage finance at a bulge bracket bank. “So how do we deal with that? Where are we supposed to find the $245bn or so of new triple-A RMBS investors? The implications are highly uncertain.” 

Disclosure debate

The Securities and Exchange Commission (SEC) is also looking to reassess disclosure requirements for RMBS originators put in place as part of the Dodd-Frank legislation. This has the potential to boost issuance further, as the Regulation AB II disclosure regime has been cited as a reason for the lack of publicly registered RMBS in the post-crisis era.  

“Since the rule came into effect, no one has done an SEC-registered deal,” says Jerry Marlatt, partner in the corporate and securities practice at Mayer Brown, in New York. “Now [the SEC] is asking for input on loan level disclosure and why there haven’t been any registered deals, and generally rethinking the extent of the disclosure regime.” 

The issue has been taken up by the Structured Finance Association, the US securitization market’s main industry group. The rule could be recast in 2020, sources say. 

“We used to do $750bn of RMBS a year. Last year was the biggest since the crisis and it was $25bn. Non-agency issuance has just been squeezed down tremendously,” Marlatt reports. 

Even so, non-QM RMBS — a term interchangeable with non-agency or private label — has doubled in size every year since 2014 even with the QM patch in the background. The market is set to nearly double again, from about $25bn in 2019 to more than $40bn in 2020. 

“Actual dollars of new mortgage origination is about $1.5tr annually, so if non-agency comes to comprise even 10% of that, it would still be bigger than most other securitized asset classes,” the mortgage banker notes. 

Slowing down

Analysts expect the US housing market to slow somewhat in 2020. Most notably, home price appreciation is likely to be down considerably. This can be attributed to several factors. 

“Supply is higher than in previous years, buying is a better deal than renting in fewer metros and foreign purchases have slowed,” notes Kaustub Samant, RMBS analyst at JP Morgan in New York. “This HPA is strong enough for the benign credit environment to continue, largely due to strong underwriting standards. Purely from a housing market perspective, however, this slower growth represents a change in the growth trajectory.” 

The bank is projecting home price appreciation of 2.5% in 2020, down from the around 5%-6% range seen over the past several years. 

Private label push

This seems unlikely to stop the private label RMBS sector’s expansion, however. ‘Hybrid RPL’ securitizations will be to the fore here, the mortgage banker believes. These re-performing loan deals are backed by collateral that has been rehabbed from non-performing status but may still have issues or is slightly behind on payments. 

“The other area is non-QM. Origination continues to increase, and there has been a significant amount of equity attracted to the mortgage space because of nationally improving home price appreciation,” the banker adds. “This drives a lot of interest in mortgage credit. When you think of the lack of housing supply in the US, this is also where we see a lot of interest in the fix and flip and investor space in 2020.”  GC