1/12/2015
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Despite A Strengthening U.S. Economy, Prime Jumbo Nonagency RMBS Issuance Grows Slowly 18Dec2014
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Table of Contents
U.S. housing has been recovering, and residential mortgage collateral performance continues to improve, a trend that we expect to continue in 2015. However, housing finance still faces challenges and relies on government support. Private capital has been slow to reenter the residential mortgage market, and nonagency securitization volume remains relatively small, with diversity and growth mostly coming from nontraditional transactions in recent years. Standard & Poor's Ratings Services believes nonagency securitizationutilizing private capitalcould be a key contributor to a more healthy housing finance market while limiting risk to taxpayers. A revival in the U.S. nonagency residential mortgagebacked securities (RMBS) market has not followed measured recoveries in the broader economy, employment, and housing. RMBS not guaranteed by one of the governmentsponsored enterprises (GSEs)such as Fannie Mae or Freddie Machit a high of $1.2 trillion in 2006, but we expect that figure to be near $50 billion in 2015, up approximately $12 billion from 2014. Clearly, even with the ongoing recoveries in the overall economy and housing market, nonagency U.S. RMBSrelated issuance remains negligible in the $10 trillion housing finance market. We believe the slow pace of nonagency securitization reflects a market still grappling with the changing economics of complying with new regulations, a lack of standardization in nonagency securitization provisions, anticipated interest rate hikes in mid2015, and a cautious investor base in newly originated nonagency RMBS. Considerable clarity has emerged regarding new regulations this year, but other limiting factors persist.
Economic Trends Bode Well For RMBS The U.S. macroeconomic picture has brightened in 2014, and we believe it could translate into positive tailwinds for the mortgage market and RMBS. Indeed, we are estimating strong economic expansion in the latter half of 2014 and expect that GDP will expand by 2.2% this year and 3% in 2015, as privatesector strength offsets continued government austerity. Moreover, we expect both continued strengthening in the job market (with unemployment currently at 5.8%) as well as some muchneeded wage growth to be obvious positive factors for future household spending and housing market activity. The Mortgage Bankers Association is forecasting a 6% increase in mortgage originations in 2015, to $1.18 trillion. Existinghome sales picked up to an annual rate of 5.26 million in October 2014. Sales of both singlefamily homes and condos/coops increased, and median prices rose throughout most parts of the country. October's supply of singlefamily homes dipped to 5.1 months after holding at 5.5 months from May through August. While trends in newhome sales were not as positive, we still expect housing starts to reach 1.29 million in 2015, with residential construction growing by 12.8% next year after slowing to 2.2% in 2014 as consumers take advantage of lower mortgage rates and job and wage gains (see "U.S. Economic Forecast: Leaning Into Growth," Nov. 13, 2014). Beyond these economic fundamentals, however, additional factors are at play in the nonagency U.S. RMBS market, and Standard & Poor's expects only limited movement in issuance volumes and credit quality in the coming year. In fact, we expect 2015 will mark another year of measured U.S. RMBS issuance backed by newly originated collateral and potentially greater volume gains in nontraditional mortgagerelated securitizations.
Traditional U.S. RMBS Issuance Growth Remains Slow The GSEsFannie Mae and Freddie Maccontinue to guarantee about 60% of total outstanding U.S. residential mortgage debt of about $10 trillion and nearly 90% of new originations, and we expect this trend to continue for several more years. In our view, in the near term, Congress is unlikely to pass any significant housing finance reform legislation to reduce the GSEs' footprint and restore private capital's role, as policymakers continue to look to the GSEs to support the recovering housing market. Many of the challenges that participants in the mortgage and nonagency RMBS markets have been facing in the postcrisis years continue to linger. They include regulatory uncertainty, investor reluctance to reenter the market, and a strong preference for wholeloan sales versus mortgage securitizations given the economics involved. Qualified mortgage (QM) standards pertaining to safeharbor protection under the abilitytorepay (ATR) rule took effect for originations beginning in January 2014. Although various governmental agencies have provided some clarity on fair lending liability implications and other issues since the rule took effect, lenders are still struggling with the potential for a wide variance in interpretation of QM/ATR (see "U.S. RMBS Roundtable: Mortgage Origination And Securitization In The PostQualified Mortgage/AbilityTo Repay Market," Dec. 17, 2014). In addition, rulemaking pursuant to the Dodd Frank legislation continues, and the market still faces implementation challenges and costs. Another major factor in limiting issuance has been large institutions' desire to hold highquality wholeloan assets on their balance sheets. Securitizations have been competing with the strong wholeloan bid among banks and other financial institutions, but as that gap narrows, an increasing number of transactions are coming to market. The wholeloan bid also influences the type of collateral available for nonagency securitization. Such collateral often comes from a wide variety of small, nonbank originators and less so from the larger institutions. This diversity of collateral sellers puts additional emphasis on varying transaction features that have concerned investors, such as representation and warranty coverage and the roles of transaction parties in enforcing relevant deal provisions in the future. The Structured Finance Industry Group (SFIG) has made considerable progress in promoting more consistent and transparent standards for U.S. RMBS transactions. We believe that standardization in future U.S. RMBS transactions is key to regaining investor confidence and participation in the nonagency securitization market.
file:///C:/Users/David%20Reiss/Dropbox/REFinblog/S&P%20Jumbo%20RMBS%20Dec%2018%202014.htm
1/6
1/12/2015
Standard & Poor's Global Credit Portal
We forecast traditional prime jumbo U.S. RMBS volume backed by newly originated assets to grow to $15 billion in 2015 from about $9 billion this year and $13 billion in 2013. Though still very small by historical standards, new primejumbo U.S. RMBS issuance has slowly ticked up in recent years from a low of $3 billion in 2011 and $6 billion in 2012. We project total traditional U.S. RMBS issuance to reach $25 billion next year, including $10 billion of securitization from seasoned, nonperforming, and reperforming collateral. Download Table U.S. Traditional And Nontraditional RMBS Issuance Forecast (Bil. $)
2013
2014
2015e
Prime jumbo RMBS
12.7
9.3
15
Nonprime/RPL/NPL
5.8
8.5
10
Traditional RMBS
18.5
17.8
25
Servicer advances
6.6
2.7
4
Tax lien
0.2
0.4
0.3
Singlefamily rental
0.5
6.6
6
GSE risk sharing
1.8
10.8
15
9
20.5
25
28
38
50
Nontraditional RMBS All eEstimate.
We project seasoned U.S. RMBS asset securitization backed by nonprime, performing, and reperforming collateral to increase to $10 billion in 2015 from this year's $8.5 billion. Legacy deals have been paying down and are increasingly subject to cleanup call termination rights, in which the holder of the termination rights can purchase the collateral out of the outstanding securitizations once the outstanding principal balance has declined to a predetermined percentage of the original balance, typically 10%. At the start of 2014, approximately onethird of the U.S. RMBS legacy portfolio that Standard & Poor's rated had balances subject to cleanup rights. What's more, that percentage will increase to approximately 40% by the end of this year. The collateral balances are substantial in the aggregate, with this 40% representing over $75 billion in collateral available for resecuritization in the coming years. Market participants have increasingly indicated that current market conditions could favor securitization for legacy assets. In addition, loan performance through the crisis serves as a strong mitigating factor to concerns about origination quality, as loans that have defaulted are continually culled from the remaining loan population. Similarly, loans that have been modified and have demonstrated significant postmodification performance, in conjunction with postcrisis homeprice gains, could open the door to more investors in the asset class.
Nontraditional U.S. RMBS Grows Moderately We anticipate that the securitization of servicer advance receivables will reach about $4 billion in 2015, up from $3 billion in 2014. However, recent regulatory scrutiny of large nonbank servicers such as Ocwen might limit any substantial expansion of newly acquired collateral in 2015 (see "Ocwen Loan Servicing LLC Residential Servicer Rankings Lowered; Outlook Remains Negative," Oct. 28, 2014). We don't expect singlefamily rental (SFR) transactions to increase materially in 2015, but they should still remain a significant portion of the nontraditional U.S. RMBS market. Thirteen SFR transactions have closed since the first deal in late 2013, and the $6 billion volume we anticipate in 2015 is comparable to that of 2014. All of the SFR transactions to date are backed by singleborrower loans, but there has been market interest in expanding this sector to multiborrower transactions. We believe there would be challenges in terms of operational management and oversight in these new multiborrower transactions, where properties are managed by a variety of local property managers rather than consolidated under a single institutional platform. Similarly, the diversity of property owners presents challenges beyond the singleinstitutional owner paradigm.
GSE Risk Sharing's Market Share Rises Risksharing transactionsin which the GSEs transfer a portion of the risk of losses to the private markethave continued their steady pace in 2014, reaching $11 billion through early December, and we expect $15 billion of issuance in 2015. In addition to the traditional Structured Agency Credit Risk (STACR) and Connecticut Avenue Securities (CAS) transactions issued by Freddie and Fannie, respectively, which transfer pro rata portions of mezzanine credit risk to private investors, another structure (using J.P. Morgan Madison Avenue Securities Trust rather than the CAS platform) was added to the mix in 2014, transferring a greater portion of Fannie's firstloss risk. We expect this issuance trend to continue as GSEs seek to offload more risk. In addition, prescribed lossseverity assumptions and the GSEs' significant power in enforcing structural protections will continue to garner significant investor confidence. Although widening spreads in 2014 could be a sign of weakening demand, we still believe investor interest will remain substantial.
Some Risks Are Expected As Lenders Start Expanding Beyond SuperPrime Borrowers Lenders dramatically tightened underwriting standards in the years after the financial crisis, resulting in newissue nonagency RMBS backed by relatively highquality collateral. This meant these transactions were mostly populated by superprime jumbo borrowers. To date, we believe that the majority of newissue RMBS are backed by highquality prime collateral, and the loans have also benefitted from almost 100% thirdparty due diligence review. However, it's also important to monitor potential risks that could arise as issuance volumes increase, credit quality starts to move down to serve more average borrowers, and securitizers move away from 100% loanlevel due diligence by using random and adverse loan sampling instead.
Legacy U.S. RMBS Performance Remains Stable U.S. RMBS collateral performance has largely stabilized, with total delinquencies down by more than 40% from crisisera levels. In recent years, rating downgrade transitions have decreased in magnitudethat is, in terms of the number of notches of rating movementas delinquency and loss trends have improved. But legacy structural mechanisms have increased the risk of ratings instability from liquidations as loan counts decrease (also referred to as tail risk) and account for an increasing portion of downgrades. Specifically, the absence of effective credit enhancement floors in legacy deals allows substantial credit support erosion, which exposes these small pools to greater losses as a portion of remaining support (see "U.S. RMBS Surveillance Spotlight: ThirdQuarter 2014 Rating Changes," Oct. 20,
file:///C:/Users/David%20Reiss/Dropbox/REFinblog/S&P%20Jumbo%20RMBS%20Dec%2018%202014.htm
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Standard & Poor's Global Credit Portal
2014). In addition, ongoing loan modifications remain a driver of transaction interest shortfalls and resulting adverse rating actions. In our opinion, persistent loan modification activitysome dictated by recent bank settlementswill likely continue in the next year and will have a negative effect on legacy RMBS as investors bear a portion of those losses (see "The Potential Impact Of Recent Bank Settlements On Legacy U.S. RMBS," Nov. 14, 2014). However, the cleanup call termination rights discussed earlier could temper further rating transitions as legacy structures terminate and new structures are created that benefit from features such as credit enhancement floors designed to mitigate tail risk. We expect that process to be gradual and dependent on market conditions that continue to make resecuritization of legacy collateral economical.
More Than Positive Economic Trends Are Needed The U.S. economy, after fits and starts since the Great Recession, appears to be on a steady recovery course. Still, the nonagency RMBS market has yet to rediscover a path toward substantial growth. While many of its regulatory issues have been settled, challenges remain, and it is unclear when this market will fully rebound as it continues to evolve. Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.
Primary Credit Analysts:
Sharif Mahdavian, New York (1) 2124382412;
[email protected] Erkan Erturk, PhD, New York (1) 2124382450;
[email protected]
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Despite A Strengthening U.S. Economy, Prime Jumbo Nonagency RMBS Issuance Grows Slowly 18Dec2014
View Analyst Contact Information
Table of Contents
U.S. housing has been recovering, and residential mortgage collateral performance continues to improve, a trend that we expect to continue in 2015. However, housing finance still faces challenges and relies on government support. Private capital has been slow to reenter the residential mortgage market, and nonagency securitization volume remains relatively small, with diversity and growth mostly coming from nontraditional transactions in recent years. Standard & Poor's Ratings Services believes nonagency securitizationutilizing private capitalcould be a key contributor to a more healthy housing finance market while limiting risk to taxpayers.
file:///C:/Users/David%20Reiss/Dropbox/REFinblog/S&P%20Jumbo%20RMBS%20Dec%2018%202014.htm
3/6
1/12/2015
Standard & Poor's Global Credit Portal
A revival in the U.S. nonagency residential mortgagebacked securities (RMBS) market has not followed measured recoveries in the broader economy, employment, and housing. RMBS not guaranteed by one of the governmentsponsored enterprises (GSEs)such as Fannie Mae or Freddie Machit a high of $1.2 trillion in 2006, but we expect that figure to be near $50 billion in 2015, up approximately $12 billion from 2014. Clearly, even with the ongoing recoveries in the overall economy and housing market, nonagency U.S. RMBSrelated issuance remains negligible in the $10 trillion housing finance market. We believe the slow pace of nonagency securitization reflects a market still grappling with the changing economics of complying with new regulations, a lack of standardization in nonagency securitization provisions, anticipated interest rate hikes in mid2015, and a cautious investor base in newly originated nonagency RMBS. Considerable clarity has emerged regarding new regulations this year, but other limiting factors persist.
Economic Trends Bode Well For RMBS The U.S. macroeconomic picture has brightened in 2014, and we believe it could translate into positive tailwinds for the mortgage market and RMBS. Indeed, we are estimating strong economic expansion in the latter half of 2014 and expect that GDP will expand by 2.2% this year and 3% in 2015, as privatesector strength offsets continued government austerity. Moreover, we expect both continued strengthening in the job market (with unemployment currently at 5.8%) as well as some muchneeded wage growth to be obvious positive factors for future household spending and housing market activity. The Mortgage Bankers Association is forecasting a 6% increase in mortgage originations in 2015, to $1.18 trillion. Existinghome sales picked up to an annual rate of 5.26 million in October 2014. Sales of both singlefamily homes and condos/coops increased, and median prices rose throughout most parts of the country. October's supply of singlefamily homes dipped to 5.1 months after holding at 5.5 months from May through August. While trends in newhome sales were not as positive, we still expect housing starts to reach 1.29 million in 2015, with residential construction growing by 12.8% next year after slowing to 2.2% in 2014 as consumers take advantage of lower mortgage rates and job and wage gains (see "U.S. Economic Forecast: Leaning Into Growth," Nov. 13, 2014). Beyond these economic fundamentals, however, additional factors are at play in the nonagency U.S. RMBS market, and Standard & Poor's expects only limited movement in issuance volumes and credit quality in the coming year. In fact, we expect 2015 will mark another year of measured U.S. RMBS issuance backed by newly originated collateral and potentially greater volume gains in nontraditional mortgagerelated securitizations.
Traditional U.S. RMBS Issuance Growth Remains Slow The GSEsFannie Mae and Freddie Maccontinue to guarantee about 60% of total outstanding U.S. residential mortgage debt of about $10 trillion and nearly 90% of new originations, and we expect this trend to continue for several more years. In our view, in the near term, Congress is unlikely to pass any significant housing finance reform legislation to reduce the GSEs' footprint and restore private capital's role, as policymakers continue to look to the GSEs to support the recovering housing market. Many of the challenges that participants in the mortgage and nonagency RMBS markets have been facing in the postcrisis years continue to linger. They include regulatory uncertainty, investor reluctance to reenter the market, and a strong preference for wholeloan sales versus mortgage securitizations given the economics involved. Qualified mortgage (QM) standards pertaining to safeharbor protection under the abilitytorepay (ATR) rule took effect for originations beginning in January 2014. Although various governmental agencies have provided some clarity on fair lending liability implications and other issues since the rule took effect, lenders are still struggling with the potential for a wide variance in interpretation of QM/ATR (see "U.S. RMBS Roundtable: Mortgage Origination And Securitization In The PostQualified Mortgage/AbilityTo Repay Market," Dec. 17, 2014). In addition, rulemaking pursuant to the Dodd Frank legislation continues, and the market still faces implementation challenges and costs. Another major factor in limiting issuance has been large institutions' desire to hold highquality wholeloan assets on their balance sheets. Securitizations have been competing with the strong wholeloan bid among banks and other financial institutions, but as that gap narrows, an increasing number of transactions are coming to market. The wholeloan bid also influences the type of collateral available for nonagency securitization. Such collateral often comes from a wide variety of small, nonbank originators and less so from the larger institutions. This diversity of collateral sellers puts additional emphasis on varying transaction features that have concerned investors, such as representation and warranty coverage and the roles of transaction parties in enforcing relevant deal provisions in the future. The Structured Finance Industry Group (SFIG) has made considerable progress in promoting more consistent and transparent standards for U.S. RMBS transactions. We believe that standardization in future U.S. RMBS transactions is key to regaining investor confidence and participation in the nonagency securitization market. We forecast traditional prime jumbo U.S. RMBS volume backed by newly originated assets to grow to $15 billion in 2015 from about $9 billion this year and $13 billion in 2013. Though still very small by historical standards, new primejumbo U.S. RMBS issuance has slowly ticked up in recent years from a low of $3 billion in 2011 and $6 billion in 2012. We project total traditional U.S. RMBS issuance to reach $25 billion next year, including $10 billion of securitization from seasoned, nonperforming, and reperforming collateral. Download Table U.S. Traditional And Nontraditional RMBS Issuance Forecast (Bil. $)
2013
2014
2015e
Prime jumbo RMBS
12.7
9.3
15
Nonprime/RPL/NPL
5.8
8.5
10
Traditional RMBS
18.5
17.8
25
Servicer advances
6.6
2.7
4
Tax lien
0.2
0.4
0.3
Singlefamily rental
0.5
6.6
6
GSE risk sharing
1.8
10.8
15
9
20.5
25
28
38
50
Nontraditional RMBS All eEstimate.
We project seasoned U.S. RMBS asset securitization backed by nonprime, performing, and reperforming collateral to increase to $10 billion in 2015 from this year's $8.5
file:///C:/Users/David%20Reiss/Dropbox/REFinblog/S&P%20Jumbo%20RMBS%20Dec%2018%202014.htm
4/6
1/12/2015
Standard & Poor's Global Credit Portal
billion. Legacy deals have been paying down and are increasingly subject to cleanup call termination rights, in which the holder of the termination rights can purchase the collateral out of the outstanding securitizations once the outstanding principal balance has declined to a predetermined percentage of the original balance, typically 10%. At the start of 2014, approximately onethird of the U.S. RMBS legacy portfolio that Standard & Poor's rated had balances subject to cleanup rights. What's more, that percentage will increase to approximately 40% by the end of this year. The collateral balances are substantial in the aggregate, with this 40% representing over $75 billion in collateral available for resecuritization in the coming years. Market participants have increasingly indicated that current market conditions could favor securitization for legacy assets. In addition, loan performance through the crisis serves as a strong mitigating factor to concerns about origination quality, as loans that have defaulted are continually culled from the remaining loan population. Similarly, loans that have been modified and have demonstrated significant postmodification performance, in conjunction with postcrisis homeprice gains, could open the door to more investors in the asset class.
Nontraditional U.S. RMBS Grows Moderately We anticipate that the securitization of servicer advance receivables will reach about $4 billion in 2015, up from $3 billion in 2014. However, recent regulatory scrutiny of large nonbank servicers such as Ocwen might limit any substantial expansion of newly acquired collateral in 2015 (see "Ocwen Loan Servicing LLC Residential Servicer Rankings Lowered; Outlook Remains Negative," Oct. 28, 2014). We don't expect singlefamily rental (SFR) transactions to increase materially in 2015, but they should still remain a significant portion of the nontraditional U.S. RMBS market. Thirteen SFR transactions have closed since the first deal in late 2013, and the $6 billion volume we anticipate in 2015 is comparable to that of 2014. All of the SFR transactions to date are backed by singleborrower loans, but there has been market interest in expanding this sector to multiborrower transactions. We believe there would be challenges in terms of operational management and oversight in these new multiborrower transactions, where properties are managed by a variety of local property managers rather than consolidated under a single institutional platform. Similarly, the diversity of property owners presents challenges beyond the singleinstitutional owner paradigm.
GSE Risk Sharing's Market Share Rises Risksharing transactionsin which the GSEs transfer a portion of the risk of losses to the private markethave continued their steady pace in 2014, reaching $11 billion through early December, and we expect $15 billion of issuance in 2015. In addition to the traditional Structured Agency Credit Risk (STACR) and Connecticut Avenue Securities (CAS) transactions issued by Freddie and Fannie, respectively, which transfer pro rata portions of mezzanine credit risk to private investors, another structure (using J.P. Morgan Madison Avenue Securities Trust rather than the CAS platform) was added to the mix in 2014, transferring a greater portion of Fannie's firstloss risk. We expect this issuance trend to continue as GSEs seek to offload more risk. In addition, prescribed lossseverity assumptions and the GSEs' significant power in enforcing structural protections will continue to garner significant investor confidence. Although widening spreads in 2014 could be a sign of weakening demand, we still believe investor interest will remain substantial.
Some Risks Are Expected As Lenders Start Expanding Beyond SuperPrime Borrowers Lenders dramatically tightened underwriting standards in the years after the financial crisis, resulting in newissue nonagency RMBS backed by relatively highquality collateral. This meant these transactions were mostly populated by superprime jumbo borrowers. To date, we believe that the majority of newissue RMBS are backed by highquality prime collateral, and the loans have also benefitted from almost 100% thirdparty due diligence review. However, it's also important to monitor potential risks that could arise as issuance volumes increase, credit quality starts to move down to serve more average borrowers, and securitizers move away from 100% loanlevel due diligence by using random and adverse loan sampling instead.
Legacy U.S. RMBS Performance Remains Stable U.S. RMBS collateral performance has largely stabilized, with total delinquencies down by more than 40% from crisisera levels. In recent years, rating downgrade transitions have decreased in magnitudethat is, in terms of the number of notches of rating movementas delinquency and loss trends have improved. But legacy structural mechanisms have increased the risk of ratings instability from liquidations as loan counts decrease (also referred to as tail risk) and account for an increasing portion of downgrades. Specifically, the absence of effective credit enhancement floors in legacy deals allows substantial credit support erosion, which exposes these small pools to greater losses as a portion of remaining support (see "U.S. RMBS Surveillance Spotlight: ThirdQuarter 2014 Rating Changes," Oct. 20, 2014). In addition, ongoing loan modifications remain a driver of transaction interest shortfalls and resulting adverse rating actions. In our opinion, persistent loan modification activitysome dictated by recent bank settlementswill likely continue in the next year and will have a negative effect on legacy RMBS as investors bear a portion of those losses (see "The Potential Impact Of Recent Bank Settlements On Legacy U.S. RMBS," Nov. 14, 2014). However, the cleanup call termination rights discussed earlier could temper further rating transitions as legacy structures terminate and new structures are created that benefit from features such as credit enhancement floors designed to mitigate tail risk. We expect that process to be gradual and dependent on market conditions that continue to make resecuritization of legacy collateral economical.
More Than Positive Economic Trends Are Needed The U.S. economy, after fits and starts since the Great Recession, appears to be on a steady recovery course. Still, the nonagency RMBS market has yet to rediscover a path toward substantial growth. While many of its regulatory issues have been settled, challenges remain, and it is unclear when this market will fully rebound as it continues to evolve. Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.
Primary Credit Analysts:
Sharif Mahdavian, New York (1) 2124382412;
[email protected] Erkan Erturk, PhD, New York (1) 2124382450;
[email protected]
file:///C:/Users/David%20Reiss/Dropbox/REFinblog/S&P%20Jumbo%20RMBS%20Dec%2018%202014.htm
5/6
1/12/2015
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