What's it going to take to boost annual issuance of private-label RMBS roughly tenfold to $100 billion-$150 billion?
A reduced footprint for the GSEs, for starters.
Respondents to a poll at IMN's ABS East conference said they could see investor demand grow this much provided that Fannie Mae and Freddie Mac pull back and "RMBS 3.0" — we're apparently still stuck in 2.0 — is in place.
Given that, if anything, the government-sponsored enterprises are rolling out even more attractive products — the budding sector of risk-sharing deals offering credit exposure to mortgages, for instance — private-label players are focusing on 3.0, a series of initiatives meant to assuage the concern of investors either burned or turned off by the subprime implosion.
RMBS players on a panel were emphatic that the significant work done on this front would bear substantive fruit at some point.
It's just not clear when.
"We're definitely doing all we can to attract investors back to the RMBS 2.0 market," said Matthew Tomiak, a managing director at Redwood Trust, the REIT credited with jumpstarting the private-label RMBS market after the crisis. He added that the industry had gone a long way in repairing the broken trust between investors and the sell-side.
So far this year, the market has seen $12 billion in issuance of private-label RMBS, according to Fitch Ratings. While this is underwhelming by precrisis standards, it’s up from $8.3 billion last year.
So there is some growth.
And while the work on RMBS 3.0 might be taking longer than anticipated, players such as Redwood Trust and fellow issuer Shellpoint Partners are tweaking their deals to attract investors.
For example, in Redwood's second RMBS under its Sequoia label this year, the issuer introduced a "stop-advance" feature. This requires servicers on the deal to stop advancing principal and interest on mortgage loans over four months overdue. In a release, Fitch said this would help holders in senior tranches of these deals.
Similarly, Shellpoint's most recent deal, Shellpoint Co-Originator Trust 2015-1, had new features that strengthened the representation and warranty framework. Among them are two triggers for breaches that aren't present in other private-label RMBS: a mandatory review in the event of a loan modification and an optional review of 30-plus delinquent loans if an originator goes bankrupt.
"We're seeing a lot of…creativity finding its way into deals," said Michael Stegman, senior policy advisor for the National Economic Council of the White House.
Another, proposed feature intended to restore investor confidence didn't seem to excite the audience much at the conference: a deal agent that would sit between a servicer and the trustee in an RMBS and act as an "independent representative of all investors," as Loomis Sayles portfolio manager Alessandro Pagani put it.
But when polled about what features for RMBS 3.0 would help bring more investor back, only 14.2% of respondents chose the deal agent. It was beaten not only by "transparent, strong underwriting standards" but also "efficient bondholder communications."