RMBS players eagerly eyeing surge in non-QM volumes
The non-qualified mortgage RMBS market is expected to double its year-on-year issuance volume in 2019, said speakers at ABS East on Monday, who predicted the sector to outpace other ABS as private capital takes a larger share of the mortgage finance market.
The non-QM sector continues to increase in volume year over year while other securitization markets such as CLOs and some traditional ABS are down slightly this year. The renewed burst of activity in the space has drawn a broader base of investors over the course of 2019.
“I would say we are seeing investors who played in the legacy space moving into non-QM,” said Mary Stone, managing director at Bank of America Merrill Lynch. “I think there are guys who like it versus the 2.0 because of the shorter duration.”
The total size of the non-QM market is estimated to be approximately $30bn-$35bn. However, panellists said that almost one third of the volume is held in regional bank accounts that “will probably never see the light of day.”
This takes the size of the securitization market to approximately $20bn-$25bn.
“That has doubled since last year,” said John Hsu, head of treasury strategies at Angel Oak Capital.
“Simply put, it is the fastest growing part of the non-agency credit market,” said James Egan, executive director of structured products strategy at Morgan Stanley.
The relatively small amount of issuance of private-label RMBS since the financial crisis has mostly consisted of newly originated prime jumbo mortgages. These deals have included loans that meet the qualified mortgage standard, with strong credit scores and payment history.
Panelists were keen to outline a number of statistics that distinguish the non-QM market from the subprime housing market of the pre-crisis years.
“Non-QM doesn’t mean subprime,” said Grant Bailey, managing director at Fitch Ratings. “There are certainly a broad spectrum of loans that fall under non-QM for various reasons.”
A borrower’s debt-to-income ratio must not exceed 43% to be considered a qualified mortgage. On top of this, the borrower must meet all of the ability-to-repay criteria, the loan must be fully amortising, with no interest-only or balloon terms; and for loans greater than $100,000 in size, the points and fees must not exceed 3%.
The market has also seen a large amount of ratings upgrades relative to other sectors, easing fears of weak performance.
“Almost all the bonds issued prior to 2018 have been upgraded, in some cases by multiple categories,” said Bailey. “The upgrade pressure has been pretty significant.”
Bailey also said that the overall US economic environment has contributed to the upgrades, citing high employment levels and central bank easing.
The non-QM market is comparatively small compared to the legacy market, which, in the peak crisis years, saw approximately a third of all mortgages packaged into a private-label RMBS deal.
Now, that figure is about one in one out of every 100.
Panellists were cautious about the future of the market, despite the upbeat mood on display at the conference.
“Our assumption is that the next three to four years is not going to be as supportive as the last three to four years,” said Bailey.
Angel Oak, which is on track to originate $3bn worth of non-QM loans this year, said that the growth of the market has come predominantly from a broadening of availability of credit from non-bank lenders which are able to reach a broader range of borrower than traditional lenders.
“If you looked at our first programme and asked: has there been a loosening in credit since you first originated that loan to now? Absolutely there has been,” said Hsu. “But, the growth of our origination is not from an expansion of the guidelines but an expansion of geography.”
The firm also said that it does not expect banks to re-enter the non-QM market, which will significantly limit the size of the sector.
“We don’t believe that there is capacity to get back to the [private] market,” said Egan.” We do not believe there is going to be that type of buyer there.”