Rules for protected loan categories related to new ability-to-pay requirements were supposed to help private-label securitizations come back in 2014, but don’t bet on it just yet.
The private-label mortgage-backed securities market next year will surpass 2013’s estimated $13 billion in new-issue PL MBS volume and continue to draw new entrants in 2014, but government intervention will largely determine the pace of that growth, according to Fitch Ratings.
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Private-label issuers of securities backed by home loans “just want consistency in rules,” says Brian Koss, EVP at Mortgage Network. “They’ve been saying, As soon as you guys finish the rules, we’ll be ready to go.’”
Ratings agencies are gearing up to rate transactions with QM loans that meet the standards for the strongest “safe harbor” protections, loans that meet the slightly lower standard for reduced “rebuttable presumption” protections, and loans outside the QM rule’s boundaries that lack these legal protections.
Moody’s, for example, plans to set credit enhancement requirements in part based on the degree of QM protections loans have by examining originators’ compliance practices and how strong mechanisms designed to protect securitization trusts from lawsuits are.
QM/ability-to-pay are primarily originator rules, but the qualified residential mortgage definition for securitization issuers related to the extent to which they need to retain ownership of risk in transactions to show they have “skin in the game” is largely the same, Fitch notes.
Buyers and sellers of new PL RMBS will likely be encouraged by QM, but they still are wary of other potential government moves, among other things.
The government-sponsored enterprises need to do more to scale back for the private-label market to more fully rebound, says Koss.
“Fear of Federal Housing Finance Agency nominee Mel Watt hurt the private-label MBS by scaring off the idea that the Fannie Mae and Freddie Mac limit would be going down,” he says.
The clear path to Watt’s nomination also raises the question in investors’ minds of whether he might
Local and regional government entities’ experimentation with programs that raise the question of whether collateral properties could be seized under eminent domain also continues to be a concern for investors as well, says Kittle.
Such regulatory developments threaten to potentially change securities’ values after investors already have paid for them, making buyers uneasy about investing until the value of the asset is more certain.
“If we didn’t have those threats we would have a vibrant MBS market,” Kittle says, noting that his views are his own rather than his company’s. Housing and rates have rebounded and collateral quality is strong, which would otherwise support more interest in the market, he notes.
There will be a slight deterioration in new pools’ credit scores and combined loan-to-value ratios in the coming year as rising rates and more players drive somewhat of a stretch for product, but it will be immaterial and constrained by a lot of third-party loan review due to QM, according to Fitch.
The private market’s own framework for protection against legal liabilities as well as the government’s still needs a more certain standard, according to Moody’s.
