Mortgage origination in the US continues to be subdued across all types of loans and there is little expectation that rates will fall sufficiently to change that in the near term. But RMBS market participants at the Structured Finance Association's Las Vegas conference this week were remarkably chirpy, as they said the asset class continues to show its adaptability.
After two consecutive sharp falls in annual issuance since peaking in 2021, delegates in Las Vegas are expecting non-agency RMBS activity to pick up in 2024. Speaking on the RMBS Market Beat panel on Monday, Michael Dente, co-head of Goldman Sachs' residential structured finance business, said that he thought 2024 issuance would end up at around $100bn — having slumped from $211bn in 2021 to $140bn in 2022 and $76bn in 2021.
"Year-to-date we're at $18bn," he said. "If you annualize that you get to over $110bn. I don't think we'll stay at that pace all year but should still see a decent amount of growth in new issue volumes."
Around 60%-65% of that will be driven by new mortgage origination asset classes, such as prime jumbo, non-QM, and closed and second liens, said the Goldman Sachs managing director.
The optimism on volumes comes despite the mortgage market itself struggling under the weight of high rates. Origination of prime jumbo, non-QM and closed and second lien mortgages all fell in 2023, and although the average US mortgage rate has fallen from its October 2023 peak of 7.8% to around 6.9%, it is unlikely to be enough to spark a revival.
"One thing about our industry is that we find a way to adapt," said Diane Moormann, senior vice president in master servicing at Newrez, said on a panel on Sunday. "One asset class might go down, but then we may see more activity in a different one.
"There's now an RTL [residential transition loan] deal whose presale went out last week and there are rumored to be a couple more in the market. That's something we hadn't seen rated much before."
Rohit Sinha, executive director in Nomura's securitized products research team, said on a panel about the evolution of the mortgage market on Sunday that he foresaw medium-term growth in the non-QM, prime jumbo, and home equity products asset classes.
'Ton' of demand
Part of the optimism is driven by the rally in spreads. The rally began late last year as broader market expectations on rates improves, but it could still have some way to run in RMBS, market participants believe, as the asset class has lagged other parts of the credit market.
"All spreads have tightened in recent months but we think there are further catalysts that can drive further spread tightening," said Sinha. "We are seeing money manager inflows increasing, demand from annuity based insurance buyers remains high, and we are seeing collateral assumptions are improving, which helps the mezz bonds.
"Most importantly, RMBS supply will remain relatively low."
The primary market is providing clear evidence of the spread tightening.
On Park Capital Management's $309m non-QM RMBS priced on February 22, the AAA rated tranche landed at a spread of 155bp and the AA rated tranche at 185bp. When the same issuer had been in the market on November 2, the triple-As were priced at 220bp and the double-As were priced at 260bp.
"Spreads have come down on the triple-As, which is the most important part of the deal," said Rudy Orman, senior vice president at NQM Funding. "On the last couple of non-QM deals that have printed, the spreads on the double As are what the triple As were six months ago.
"It's because there’s investor demand. They feel like the market is looking good insofar as performance, and there are enough [non-QM] deals for them to be able to track the securitizations."
In addition, issuers have been able to price some tranches further down the capital stack when "last year there was no execution", said Orman.
This leaves investors highly confident that increased supply will not cause any indigestion.
"Higher supply will be very easy for the market to absorb," said Pooja Pathak, who leads the non-agency RMBS trading and credit team at MetLife. "Honestly, there aren’t enough assets to go around and each deal prices tighter than the last.
Pathak said that she believed spreads had particularly lagged in prime jumbo RMBS.
"As an insurance company we have a lot of places to put money to work, and [prime] is a good place where you can still get good value," said Pathak. "Even though the credit curve has compressed, I think the subordinate [tranches] add a lot of value."
Michael Daurio, chief investment officer at American Mortgage Investment Partners Management, said there was a "ton" of demand in the market.
"At times in 2022 there was no bid at all, but there’s no reason to think a situation like that will come back," said Daurio. "There'll be volatility, but there’s a lot of demand for everything, so don’t think for a minute there won’t be competition for whatever you’re looking to buy."