The bankruptcies of Tricolor and First Brands were mentioned in every discussion at the FT Live/FIN ABS East conference last week. But when the people talking were from the mortgage market, it was usually no more than a passing remark.
Fair enough, perhaps — one made subprime auto loans, the other car parts.
Yet mortgage folks were just as quick to dismiss news that Western Alliance and Zions Bancorp had announced fraud in their commercial loan books just a week before, thanks to a single real estate investor — a blow that dragged down the regional banks share index.
One might think that with so many casualties recently, there would be words of caution. If so, they stayed in the rooms where ABS and CLOs were being debated.
Home loan practitioners brushed all these events off, saying they were non-systemic and would not have any implications for the mortgage securitization business.
Business as usual
Meanwhile, investment banks’ and rating agencies’ meeting rooms were busy from morning to night.
An issuer said it was expecting another 20 non-qualified mortgage securitizations before the end of the year — then came the largest of the year so far, JP Morgan’s $802m fixed and floating rate deal.
Freddie Mac held a roadshow for its seasoned, re-performing and non-performing loans. So did Pimco and a bunch of other issuers.
Neither the government shutdown, which has interrupted the provision of economic data, nor uncertainty about the next interest rate cut were enough to dampen the show for those in RMBS.
Rates and Trump
Catch a mortgage specialist in chatty mood and the conversation was likely to turn to how there is an inflection point in the market now that interest rates are falling — many borrowers can see their first opportunity to refinance.
One investor said there were nearly $1tr of loans with at least 50bp of refinancing incentive. If rates fall another 50bp this increases to $1.6tr, and if rates go up by 50bp it falls to just under $500bn.
There was much speculation about whether the Trump administration will try to privatize the mortgage agencies Fannie Mae and Freddie Mac.
The Federal Housing Finance Agency is holding a public consultation until November 5 on its strategic plan for 2026-30, but this does not mention privatization.
Another hot topic was how insurance companies are gulping down non-QM mortgages and home equity loans and lines of credit. This year they have pumped more capital into non-agency RMBS than in the last couple of years.
Unanswered questions
A portfolio manager at a major asset manager said she found it surreal. She had come to the conference with concerns about bankruptcy and fraud.
She had visited a Tricolor dealership several years ago as part of due diligence and been concerned that it seemed too clean, so her firm did not invest.
But she said there were no serious attempts at ABS East to provide answers on these issues.
Plenty of people gave excuses for the Tricolor debacle — from its immigrant borrower profile to how car loans are based on new Fico scores that make it easier to get a loan, whereas home loans use traditional Fico scoring methods.
Unlike car loans, not everyone takes a home loan as it is a "serious commitment", they said.
Other speakers did address risk.
A rating analyst said mortgage securitization pools ideally contained less than 10% loans to foreign nationals or immigrants without social security numbers who identify themselves using independent taxpayer identification numbers (Itin). Any more, and the ratings are lowered — so mortgage deals are a bit better protected than auto ABS.
He said there had never been more borrower equity in the US housing market, with loan-to-value ratios on new loans typically between 70% and 90%, with nothing above 90.9%.
Another analyst said delinquencies on non-agency RMBS were low and within expectations.
Qualms detectable
Deutsche Bank analysts have their ears to the ground and are picking up rumblings of trouble.
A report by the bank on October 21 noted that there was high dispersion in performance among RMBS backed by non-qualified mortgages, especially those issued in 2023 and 2024. Some have much higher 60 day-plus delinquences than others.
Dispersion usually increases with seasoning, Deutsche said, but the pattern was stronger in those vintages, as some originators had stretched their underwriting.
But to judge by the market's mood in Miami Beach, these are worries for another day.
Bank of America said in a report that its analysts had gone into the conference in cautious mood, but picked up that “investors left feeling assured — although not overly bullish — on the sentiment. Expect a rally to follow.”