The release of the final qualified mortgage rule resulted in positives for home prices and created additional upside potential, market analysts said.
But recent developments also suggest the post-crisis rally in private securitization that started in 2009 may be nearing a “euphoric end.”
“We recommend slowly moving up in credit and reallocating to duration, specifically Fannie 3s, over the next month,” said Chris Flanagan, head of US mortgages and other structured finance research for Bank of America Merrill Lynch (BAC).
In November, Paul Miller with FBR Capital Markets suggested the ability-to-repay rule and QM rule could ensure the long-term survival and dominance of the 30-year, fixed-rate mortgage and the end of product that surfaced during the housing bubble.
“This preference, the guarantee on principal and interest on Fannie Mae and Freddie Mac securities, and the removal of subprime product features should make the return of meaningful private securitization extremely unlikely, in our opinion,” he wrote at the time. “These changes should also prevent new entrants from eroding underwriting standards in an attempt to increase market share.”
Recently, Miller told HousingWire that the final QM rule will not change any market fundamentals over the long-term. In fact, the rule will make it even harder by making Fannie Mae and Freddie Mac loans ‘QM standard loans’.
“The government on one side is saying we need private label. But they’re so afraid of screwing up the housing market, so they keep going soft on these QM rules, which continues to lead us down the path of dominance by the GSEs,” Miller said. “Now on the flip side, the private label guys would say, ‘Yeah, they’re getting that, but they’re raising g-fees. And the g-fees will push people out.’ But I don’t think it will.”
Miller said products such as Alt-A, subprime and pay-option ARMs – which surfaced during the housing bubble – cannot be originated today.
“So what are you going to do?,” Miller asked. “You’re going to go against a conforming fixed-rate mortgage that Fannie and Freddie are doing at 3 and a half? There’s no economics in that.”
Companies like real estate investment firm Redwood Trust (RWT) have already made a play in this space over the course of the past few years and emit a certain confidence about private-label RMBS deals.
Redwood recently set a goal to issue about once a month in the new year and has so far stayed on that path.
The first deal in 2013 is set with Barclays Capital (BCS) on Jan. 15, with a $300 million offering. The REIT’s full-year volume is expected to exceed $4 billion.
However, Miller noted that there’s very “little economics” in what the firm is doing in the market.
“There’s economics, but it’s not enough to carry today, I believe,” he said.
