Residential mortgage-backed securities made up of loans originated after the Dodd-Frank reforms were put into place have performed well, according to a recent analysis, but newer vintages extended at the height of the recent market cycle may be riskier.
The Q2 Prime 2.0 RMBS Dashboard analysis from Fitch Ratings took a deeper look at 6,248 classes across 195 Prime 2.0 RMBS transactions issued between 2012 and 2022. Nearly all—96.9%—of ratings are investment grade or higher, and 4% of the classes were upgraded as part of the analysis.
"While there is increasing pressure in the form of home price corrections and deteriorating macroeconomic environment, prime jumbo borrower performance remains robust, and structures and credit enhancements support a significant stressed scenario at this point in time," said Court Lake, a director in Fitch's RMBS group.
Borrower performance is stable, the report notes, with total delinquencies less than 5%. That's to be expected, said Andrew Gibbs, who leads the Depository Institutions Group for Mercer Capital.
"It partly reflects the improved underwriting since the great financial crisis, when some of the more aggressive structures like interest-only loans went away," Gibbs said. "We've had a good run in housing prices ever since the last financial crisis. Housing prices have appreciated and that's led to lower loan-to-value ratios."
Brisker home price appreciation over the pandemic period may turn out to be a risk factor for mortgages written in 2021 and 2022, however, according to the report.
"Recently we have seen home price corrections and declines, especially in the western part of the U.S.," Lake said. "In 2023, for deals issued with an average loan-to-value (LTV) of 70, the expectation is that LTV's will not decrease, but in fact increase." Fitch estimates that home prices are about 7.8% overvalued as of March 2023, according to the report.
Another risk for mortgages issued more recently is the exceptionally low interest rates they carry. The weighted average coupons for the 2022 and 2021 vintages rated by Fitch are 3.38 and 2.98, respectively.
"Prepayments over the last 6 months are at historical lows," Lake said. "This 12-month stretch of slow prepayments is much lower than any period pre-2012."
If homeowners continue to hold those mortgages longer than expected, investors will have longer-duration exposure than many expected, Gibbs said.
That's even as the overall picture is worsening.
"Collateral for the 2023 vintage is slightly weaker than what Fitch observed in the 2022 vintage," the report notes. "These borrowers have lower FICO scores, higher LTVs and higher DTI ratios. The macroeconomic environment has worsened since 2022, heightening pressure on the 2023 vintage."Still, Lake said, Fitch is not projecting large-scale downgrades, calling the securitizations' collateral and structures "robust enough to largely maintain the current ratings."
One surprising finding from the report, Gibbs said, is higher rates of delinquencies among owner-occupied borrowers compared to loans made to investors and for second homes. That's likely due to stronger credit profiles for those types of mortgages, the report suggests, but Gibbs points out it may also be due to constraints in the housing market: many borrowers trying to buy their own homes have had to "stretch a bit," he said.
