Mortgage-backed securities professionals are increasing the proportions of traditional agency collateral in private-label deals, judging each transaction's economic situation and responding accordingly, panelists said at the Mortgage Bankers Association (MBA) Secondary and Capital Markets Conference held this week in New York City.
Mike Frantantoni, chief economist at the MBA, said that some of the association's members have told him that they are placing government sponsored entity (GSE) loans into private label securities (PLS).
This movement toward the PLS market is driven by one factor only, said John Sim, a managing director at
"When you see a traditional Fannie Mae loan head into the private label space, it's just economics," Sim said. Getting the best execution and where the loan can be optimized, whether it's through loan retention or going into a GSE or private label deal, are the driving considerations, he added.
There is a sweet spot where loans with marginally higher loan-to-value (LTV) ratios find better economic execution in the private-label space, Sim explained.
Sim said that most of the growth in the non-qualified mortgage sector is from non-traditional underwriting that uses bank statements, as well as debt service coverage ratio (DSCR) loans, whose investors are not on a GSE's platform.
There would be "a lot of growth there until you see an expansion of the credit box. We are not seeing that yet," Sim said. "We are just starting to see some lower-credit-score bank lending," although it's still a tiny portion.
Better LTVs have always been the mitigating factor, so once higher LTVs are seen, that's when the parameters of allowable loans in a portfolio has expanded too far. That hasn't happened yet, Sim added.
One area where there has been significant non-agency securitization of agency collateral is the agency investor space, said Jeana Curro, managing director at Bank of America.
"That's a good example of where LLPs are pricing in a lot of risk, but lenders feel that risk is justified," she said.
