JAN 4, 2013 5:50pm ET

Will Increases in Guarantee Fees Spur Any Private-Label MBS?

JAN 4, 2013 5:50pm ET
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Some think the private-label mortgage-backed securities market can make more of a comeback this year due to factors like the agencies’ rising guarantee fees, scarcity of higher-yielding assets for investment and home price appreciation make selling into PL MBS more attractive. But others are skeptical.

Credit Suisse vice president Luke Scolastico, whose firm has been buying loans for securitization, said that the securitized market “is not as large as it was but we do think it’s going to continue to grow into next year.”

In addition to positive home prices and the scarcity of investment assets, Scolastico noted that with Fannie Mae and Freddie Mac set on a course of increasing guarantee fees, the notion of whether there will reach a “tipping point” where the private market will provide a home for loans competitive with the government-sponsored enterprises at some point has come into play.

But how important the agency guarantee fee is and whether or when there is a tipping point in terms of its rising price is debated among originators, FBR Capital Markets research analysts and senior vice president Edward Mills told attendees at the ASF meeting.

“We have a hard time seeing a robust PL MBS coming back any time soon,” he said. Mills said one hurdle is pending regulation like the qualified mortgage definition, which could determine which loans have some legal protection from the new requirement to ensure borrowers have the ability to pay loans they are given. Also investors in some cases still lack confidence in the private-label market and ratings agencies, he said, which factors into how much they may value the GSEs’ guarantee compared to a PL MBS transaction.

Scholastico acknowledged the assignee liability that exposes investors in loans to the ability-to-pay assessment risk could be a concern, but noted that this will be less of one for parties like warehouse lenders who hold the loans for shorter periods of time.

He still believes even apart from this other developments such as signs of broad-based recovery in the housing market do augur well for PL RMBS this year.

Data do support home price recovery in the majority of U.S. markets this year, Veros’ vice president of statistical and economic modeling Eric Fox told this publication, commenting on a forecast the company did assessing multiple factors that influence appreciation.

Some potentially unsustainable factors such as international, second home and investor interest do play into the home price forecast and there are still employment concerns in some markets. But Fox said 2013 accounts for how sustainable the appreciation is, suggesting that it will continue at least through this year. Veros forecasts appreciation for about 70% of U.S. markets, and the 30% of markets for which it forecasts depreciation, the forecasted amount of depreciation is not large, Fox said.

Also arguing for a PL MBS revival this year is change in some banks’ competing appetite for the prime credit quality jumbo products. This has held back the availability of product for PL MBS issuance, but it is abating, according to Scolastico.

While banks have had a voracious appetite when it comes to putting these products on their balance sheets, he said the market is reaching a point where large bank originators are tiring of the challenges involved in funding long-term duration mortgages with their deposits.

While larger originators have stepped back, smaller banks—as well as non-depositories that are more likely to fund through securitization—have been stepping up. Also ratings agencies have gotten more comfortable with the prime jumbo collateral originated since the downturn as it now has more of a track record and has performed with only “a handful of defaults.” This has made credit enhancement requirements “much more reasonable,” making securitization deal economics relatively more attractive.

But when asked about whether the PL MBS market might expand beyond pure prime jumbo collateral into near-prime, Scolastico said prospects for this look “terrible” and investors and ratings agencies lack comfortable with it. It would be cheaper for the GSEs to open up their credit box than for the PL RMBS market to, he said.

Ratings agencies are waiting to see how those loans will perform going forward under the post-downturn underwriting regime, Jack Kahan, associate director at Standard & Poor’s, told attendees at the ASF meeting.