A total of 10 private-label deals valued at nearly $5.4 billion hit the market in the first two weeks of 2022, HousingWire reported last week, but that’s already old news.
Since then, another nine private-label residential mortgage-backed securities (RMBS) offerings valued at $4.6 billion have unfolded. That brings the number of private-label transactions over the first three weeks of January to a total of 19 — backed by mortgage pools valued in aggregate at some $10 billion.
And it’s likely that even more deals will come to market prior to month’s end. The RMBS tally as of now, then, based on a review of bond-rating reports, is as follows:
- Five private-label jumbo-loan deals backed by some 3,700 mortgages valued at $3.3 billion.
- Seven RMBS investment-property/second-home offerings backed by some 11,500 mortgages valued at $3.6 billion, including the first investment-property deal of the year by J.P. Morgan, which accounted for some 18% of the market by volume in 2021.
- Seven non-QM private-label securitizations backed by 5,400 loans valued at $3.1 billion. (Non-QM mortgages include loans to the self-employed, such as small-business owners or gig workers, and other borrowers who fall outside the box of agency lending guidelines.)
Part of what is driving the flurry of RMBS activity so soon in the year, according to John Toohig, managing director of whole-loan trading at Raymond James, is the multiple anticipated Federal Reserve rate hikes being eyed for 2022, starting as early as March — which will put upward pressure on mortgage rates as well.
“There’s a rush to the door because everybody’s thinking about that expected March [Federal Reserve] rate hike,” he said. “A lot of issuers want to get their deals priced before we see rates move.”
A December report by prepared by Urban Institute’s Housing Finance Policy Center shows that the private-label market’s share of mortgage securitizations was slightly more than 4% as of October of last year, up from 1.83% in 2012 and fast approaching its post-crisis high of 5% in 2019. It’s worth noting, however, that at its peak, just prior to the housing-market crash in 2007, private-label issuances accounted for nearly 60% of the mortgage-backed securities market, the Urban Institute’s data show.
Kroll Bond Rating Agency projects that 2022 private-label issuance will reach $132 billion, up from an estimated $115 billion for 2021. RMBS issuance, for the purposes of the KBRA report, includes all post-crisis prime, non-prime and credit-risk transfer transactions sponsored by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
Another driver of the private-label market in the year ahead is expected to be recent loan-fee increases announced earlier this month by the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie. This latest policy change for the agencies will bump up loan-level origination fees for high-balance mortgages by between 0.25% and 0.75%, based on a tiered loan-to-value schedule. For second-home mortgages, the tiered fees will increase between 1.125% and 3.875%.
“The changes in pricing that the FHFA has imposed on high-balance loans, for example, [and on second-home mortgages] will in our view increase the part of the market that’s in the private-label space,” said Fannie Mae’s chief economist, Douglas Duncan. “A lot of that [loan volume] will be high-quality — it’s not subprime — but if they get better pricing in that market, you’ll see some of the business flow in that direction, given the pricing changes that are being imposed.”
Dashiell Robinson president of Redwood Trust, a major RMBS issuers, echoes Duncan’s analysis.
“We do view the announcement to be a constructive one for the non-agency market,” he said. “The new pricing framework … should shift supply toward private market participants.”
Mortgage interest rates are rising, however, and are expected to reach 4% by year’s end, according to a forecast by the Mortgage Bankers Association’s chief economist, Mike Fratantoni. The rising-rate environment, industry observers such as Duncan say, is expected to shift the market toward purchase mortgages and away from the huge volume of refinanced mortgages — which has driven growth in the overall housing market over the past few years.
The shift will create a more challenging environment for the private-label issuers in the year ahead as well, but is projected to propel the growth of non-QM lending, according to industry observers.
“After nearly two full years of historically low interest rates, the housing industry will see a distinct shift …,” states a recent report from digital mortgage exchange MAXEX. “It’s incumbent upon originators to ensure they have breadth in their product and investor choices in order to give borrowers options in a much more competitive purchase market.”
Who are the major buyers on the other side of these RMBS deals? Is that shifting at all as buyers digest rate environment and FHFA fees?
Based on my reporting so far, the buyers/investors in the private-label [non-agency] securities space are primarily institutional players, such as insurance companies, among others. How their investment patterns are being adjusted in the current environment, if at all, I can’t say with any confidence. It’s something I’m interested in finding out, however, via reporting.
The impact of the FHFA fee increases and rising rate environment isn’t easily figured, though the fee bumps are expected to help drive more volume to the PLS market — both on the high-balance and second-home loan side, according to market observers I’ve interviewed.
The rising rate environment is expected to reduce refinance volume, and again here, though difficult to say for sure, it may reduce potential PLS volume this year to a degree because there will simply be fewer overall new mortgages to pool [agency and non agency] in a purchase environment marked by dwindling refinancing opportunities.
Still, the PLS market so far is projected to continue its expansion — now accounting for around 4% of the residential MBS market, with the agencies dominating the balance. Part of the growth is expected to come from an expansion of non-QM purchase lending in the year ahead. This story offers some evidence that the non-QM side is alive and well.
In addition, the loan-fee adjustments for higher-balance loans and second homes, as mentioned, are seen as a net plus for PLS issuance this year, largely offsetting the drag of the FHFA’s suspension of agency caps on investment-property mortgage purchases and the recently expanded GSE loan limits set to take effect in April, according to some issuers.
As always, facts trump speculation, and that’s what the reporting is about. Getting the facts and insights from the experts. So I’m very open to suggestions/comments from those in a position to know, or from those with insights that only experience can inform. Please feel free to reach out to me at [email protected] with your tips, leads and analysis.
Thanks a lot for this additional context, Bill.