Has it Been Ten Years Already?
For those of us who’ve been in the industry for many years, “When will the private-label mortgage-backed securities market (PLMBS) return?” can garner a few yawns or even groans. If I haven’t lost you already, allow me to point out that we recently eclipsed the 10-year anniversary of the height of the PLMBS market which hit peak in June 2007 (Figure 1). So, to mark this milestone or at a minimum to humor me as I tackle my first Insights Blog Post, allow me a few minutes of your time to review where we’ve been and where we might be going.
Since that peak in June 2007, which just so happens to coincide with the Bear Hedge Fund collapse, new issuance began its rapid decline until it basically amounted to nothing the following summer of 2008. While the quick demise of two highly leveraged funds investing in Subprime securities was a good indicator that something was up, perhaps a better and earlier indication that mortgage collateral performance was deteriorating could have determined by simply examining the data. When comparing early-stage delinquencies based on age across several vintages, it is blatantly apparent that the 2006 and 2007 vintages were off to a rough start considering that levels were almost double after only 6-months of seasoning (Figure 2). As they say, hindsight vision is 20/20 although I’m sure there are some risk management professionals out there thinking, “I told you so.”
So, what has changed since public PLMBS issuance went into self-induced hibernation? The short answer is a lot! The industry as-a-whole has been introduced to a host of new acronyms into our vernacular to “simplify things” and promote transparency. CCAR, DFAST, CFPB, QM, ATR, TRID, and the new HMDA regulations have created a gauntlet of obstacles for public issuance in the form of uncertainty surrounding repurchase risk to stringent capital requirements suppressing the flow of non-GSE lending. While these more origination-centric changes certainly play into the discussion; more specific to PLMBS issuance is Regulation AB II which the Securities and Exchange Commission (SEC) has rolled out in phases over the last several years. This ruling governs the process for registering and disclosing asset-level information associated with new offerings and will be the topic of a future blog post.
Regulatory issues aside, you need volume to reach critical mass for the economics of securitization to make sense. That said, there is an expectation that the outlook for rising interest rates and a shift to purchase money lending will translate to higher concentrations of alternative product types (e.g. ARMs / IOs) which typically aren’t securitized through traditional GSE channels. Furthermore, an elevated rate environment should positively influence bond yields in a structured transaction; supported by more diversified pools of mortgage cash flow with increased interest payments flowing through to the trust. The question is, will it be enough to offset the negative economics caused by delayed settlements resulting from satisfying REG AB II administrative requirements?
So, will we see an explosion of public PLMBS issuance in 2017? Probably not, but perhaps a ripple of growth as traditional issuers increasingly become emboldened to navigate the unchartered waters of REG AB II. I opt to remain optimistic that non-bank lenders will ultimately seek some form of public securitization as an efficient means to grow their business and capture market share. On the flip side if traditional banks experience any easing in regulation and can free up some capital, thereby leveling the playing field, things could get interesting…
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