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Roughly $10 billion to $20 billion annually in non-owner-occupied mortgages will need a new outlet following Fannie Mae and Freddie Mac’s 7% cap on purchases of such loans per year, Kroll Bond Rating Agency reported Friday. While that estimate is significant, it may not overwhelm the non-agency market or even necessarily hurt interest rates, analysts said.
That suggests that investor loans’ transition to the private market may not be disruptive for larger players that already have access to securitization pipelines.
“I don’t think we have a concern that the private market wouldn’t be able to absorb even the whole amount,” said Jack Kahan, a senior managing director at KBRA, in an interview.
It’s too soon to say what the long-term pricing implications of the shift will be but Kahan said the private-label market’s relatively large appetite for investor home loans over time suggests that it’s not necessarily a negative outcome.
“While any type of change in the execution of these loans would potentially increase the risk that some rates could go up on this product, the flip side is also possible. We could find that the private market can pick up this product and it could price better than at the agencies,” he said.
The share of non-owner-occupied loans in the private label market did fall last year, likely due to broader caution about credit amid the pandemic, but previously it was on an upswing that it could return to given that the economy is showing signs of recovery. Even though last year’s 16.7% NOO share of the private securitized mortgage market was down from the previous year’s 26.3%, 2020’s percentage was historically strong.
While the prognosis for the private-label market’s ability to absorb investor loans is relatively good, a temporary challenge with absorption could occur along the way, given that this will make up a substantial portion of the current market.
“If the amount that shifts is this large and the market changes quickly, the transition may take time,” Kahan said.
Fannie Mae leadership has indicated that the agency hasn’t seen much of a change in the volume of non-owner-occupied home loans it has been buying, which suggests there hasn’t been a dramatic shift in the larger market to date.
“We have yet to see any material impact on acquisitions,” Fannie Mae CEO Hugh Frater said during a recent press briefing held in conjunction with the release of
However,
Also, given some credit-sensitivity in the market, the appetite for loans that lack full documentation might differ from that for loans with more standard underwriting, said KBRA Director Armine Karajyan. Prime agency-eligible investment properties have had a strong performance track record, even during the pandemic, that will likely encourage investment by the private market, Karajyan said.
While consumer demand has been particularly strong for second homes, and investment properties have predominated in recent private securitizations, the historic average for the split between the two categories has been roughly 50-50, so non-agency investor demand will likely be healthy for both property types, said Kahan.
Second home demand has been double that of primary residences, according to a recent Redfin report. While the year-over-year increase is exaggerated due to the initial impact of the pandemic last April, the company found that demand for second homes increased by 178% year-over-year in April 2021 compared to a 78% increase in demand for primary residences.
