RMBS issuances highest in two years

Issuances of residential mortgage-backed securities are at their highest in two years, with performance outlook appearing solid despite an uptick in prepayments, Morningstar DBRS said.

RMBS deal pricing for the current month totaled $7.3 billion through June 21, according to data from Finsight. The pace slowed from May, but four issuances since the Juneteenth holiday propelled activity over the past several days. The recent deals, including from Redwood Trust and Hometap, seem likely to push second-quarter volume above the January-to-March total of $27.9 billion. 

Activity in the first half of 2024 is the highest since the Federal Reserve began its most recent monetary tightening program in the first quarter of 2022, with trends likely to continue, Morningstar said in its latest report. 

"Even if the current housing and economic backdrop remains the same, the overall RMBS sector credit performance in H2 2024 is expected to remain within the context of H1 2024, save for expected [delinquencies] and loss mitigation based on further seasoning."

Loan performance should also cause few signs of stress to investors. "The environment for the RMBS credit performance H1 2024 has been primarily influenced by modest (but persistent) home price appreciation and historically low unemployment," Morningstar said.

"Individual RMBS deal performances have remained satisfactory with levels of credit enhancement incrementally and consistently improving," the company wrote. 

But a few signs of late-term borrower distress were also lurking within the data. While delinquency numbers trended lower in May, albeit with some volatility, "within DQ pipelines there has been an ever so slight swelling in later-stage buckets as portions of some loans seem to be lingering a little longer in the pipeline."

Although still historically low, prepayment speeds also picked up, primarily due to the spring home buying season. Housing turnover has driven prepayments this year, as some buyers returned to the market, at the same time most homeowners find little refinance incentive at current rate levels. 

The findings corresponded to trends observed at ICE Mortgage Technology in May. The prepayment share that month came in at 0.58% of all mortgages, but volumes saw a 10.5% rise between April and May, according to the data provider. On an annual basis, prepayments increased 6.6% last month to finish at their highest since Sept. 2022, ICE said.    

While the market forecast looks generally healthy, Morningstar warned of the effects any economic slowdown or potential recession could leave on mortgage performance, pointing to signs of corresponding rises in some types of delinquencies alongside the latest unemployment levels. The distressed rate of single-family residential loans is tracking closely to the unemployment rate. Meanwhile, credit card delinquencies are also running higher, a development recently noted by the Federal Reserve Bank of New York.