The manner in which regulators removed
"The almost universal reaction from everybody seemed to be 'where did this come from, we had securitizations lined up and now we're suddenly playing by a different set of rules,'" said Vadim Verkhoglyad, vice president and head of quality assurance at dv01.
Prior to the lifting of the caps, some aggregators might have expected these loans to be delivered to them.
"I think generally speaking, markets like to have transparency, openness and advanced knowledge of key changes," added Roelof Slump, managing director at Fitch Ratings. "This was relatively sudden; it was relatively quick." But for the originators that Fitch has spoken to, it provided "an opportunity for alternative delivery so they were not too upset by it."
This market will not fold because of what the Federal Housing Finance Agency did, both with the suspension of the caps put in place in January, as well as the recent decision
"What's more challenging is the lack of recognition that private label credit is significant and an important part of the market that provides access to credit that doesn't hit the GSE benchmark," Verkhoglyad said. "And that creating a sudden announcement from the larger universe that has such an oversized impact on the small universe is ultimately just detrimental to the mortgage universe as a whole."
The cap, along with the single securitization platform, helped to put
"So, what would be only more helpful is to acknowledge that the entire market benefits from a unified structure, and we should incorporate the private label universe into it and give them that framework," Verkhoglyad said. "It only solidifies kind of the emergence of this sector as a legitimate avenue of credit, providing credit to borrowers the GSEs can't serve all that well, and that we have come full circle from that perception in 2007, which was kind of the Wild Wild West in terms of
Up until the start of the pandemic, the private-label market — and its subset of non-qualified mortgage securitizations — had been growing rapidly.
But that was only a hiccup and in recent months, originators of non-QM jumped back into the space, said Slump. "There's been more issuance and from all the conversations that we've had at the Structured Finance Association conference, and directly with originators, aggregators and issuers, it feels like that production and securitization will only be increasing," he continued.
Every month from February through September has ranked in the top 20 since the financial crisis for non-agency mortgage-backed securities issuance, according to a Bank of America Securities report.
June was the busiest month in recent years, with issuance of $25 billion.
"We are currently projecting around $178 billion of issuance this year, which will be a post-crisis record," the report said. "However, net issuance is still expected to be flat or slightly negative with prepays and deal redemptions remaining elevated through this year."
Year-to-date gross issuance is $145 billion, which is more than the $137 billion issued in 2019, the last normal year; even with the pandemic causing some securitizers
While removing the caps could drive those second-home and investor loans back to GSE execution, it is not a given.
"In discussions with originators, they've told us that that's not always the case, that there can be situations with certain loan coupons that can still make more sense to deliver to non-agency despite it being accepted without caps to Fannie and Freddie," Slump said. "And there can be certain adjustments that the GSE have for these loans which also can make that attractive."
He also noted that some originators of these mortgages are not Fannie or Freddie approved sellers and they don't necessarily have to sell to an aggregator, but instead to a buyer that could portfolio the loan.
However, loan delivery to Fannie and Freddie is much easier than to the private market because of the standardization they offer to sellers.
"On the non-agency side you've got things like due diligence and independent third parties looking at the loans that are typically done, and sale agreements that have to be negotiated," said Slump. "There is some upfront work that over time becomes easier, but clearly, operationally delivering to Fannie Mae and Freddie Mac if you're a licensed seller/servicer is quite easy."
Being able to do private-label securitizations on the CSP could be good from an investor standpoint because it will bring greater clarity, transparency and standardization to the deal.
"But the investor appetite right now for non-agency securities seems to be quite strong, and it doesn't seem to be a blockage," Slump said. "Interest rates are relatively low, there's a continued search for yield and it does seem like this will not in itself be a stumbling block for their activities."
A lot of the market success for private-label is predicated on credit spreads and then the general economic views around credit, said Tom Millon, the CEO of Computershare Loan Services US and the Capital Markets Cooperative.
"But if you look sort of maybe over the longer term, we think anyway the private-label market has a bit more pricing risk attached to it because risk is priced on a very live basis, Millon said. But Fannie and Freddie securitizations "have more certainty around spreads, at least in the near term."
While the larger players in the market will be more able to take advantage of the arbitrage opportunities, for mid-sized and smaller lenders, they will be able to sell to Fannie and Freddie without worrying about bumping up against the caps.
"Since they suspended the cap it's really a pretty normally functioning market and actually I'm not hearing any noise from our originators, 'Oh my gosh, what am I going to do with my non-owner loans,'" Millon said.
At the end of the day, though, the impression from these changes is not good for the overall perception of the private-label market.
"I think ultimately what both of these things are pointing to is just not a great recognition of the value that the private-label market brings," Verkhoglyad said. "And I think that's ultimately just a detriment to overall housing availability, especially for people without traditional means of access to credit."
