Private-label residential mortgage securitizations continue to be relatively scarce, but the market keeps coming up with creative ways to issue them from time-to-time that are worth noting as investors continue to hunger for yield.
In addition to Redwood's latest Sequoia jumbo deal backed by recently issued loans, Standard & Poor's last week put out a presale report on a Prudential covered trust transaction that some market participants said was unusual. S&P didn't have much to say about the deal when called for comment, but word on the street was that it was a bit like a covered bond in structure and rated based on Prudential's insurance on it. Otherwise it sounded like it was somewhat in line with the trickle of seasoned/resecuritized nonconforming residential mortgage-backed securities out there these days that are often sold to qualified institutional investors under Rule 144A.
When asked for an update on the state of RMBS issuance in general, Fitch senior director Suzanne Mistretta told this publication, “Other than Redwood, you're seeing these off-the-run deals or issuers.” The banks, she noted, are “keeping everything in portfolio or selling them to the GSEs” because the recent market environment has generally made it relatively attractive to keep them on balance sheet.
Data released last week by the American Bankers Association show banks retained in portfolio more than 41% of one-to-four family mortgage originations in 2011, as compared to closer to 38% in 2010.
Uncertainty surrounding risk retention and the government-sponsored enterprises' involvement in securitization also remain hurdles for banks when it comes to issuance. But there continues to be possible opportunity for real estate investment trusts, Fitch analyst Grant Bailey told this publication.
The analysts also acknowledge that rating agencies' credit enhancement levels can be cost-prohibitive and an issuance hurdle. They said a big factor in this at Fitch is the fact that given still-outstanding REO inventory and other factors, a further drop in home prices looks like it lies ahead at the rate of 5%-10% on average nationally and as much as 20% in, say, San Francisco, for example.
More optimistic economic forecasts, like Freddie Mac's monthly outlook last week, indicate the home price indices could fall as little as 2% on average nationally and even bottom out this year. But Freddie's chief economist Frank Nothaft told this publication to keep in mind this could “mask a great diversity of house price performance around the country” as “housing markets are really local.” Some other forecasts like Fitch's call not only for more depreciation but also expect the bottoming out of home prices to occur farther in the future.
Some who had been gearing up for securitization's comeback did become discouraged while waiting for a turnaround in market conditions and have given up because of the many challenges. But there persists a stubborn interest in PL RMBS among other existing or potential residential mortgage issuers. Bailey said the PL RMBS market will likely never again relax standards for equity and documentation, but some originators have shown interest in, for example, self-employed borrowers.
