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Lenders 'just scratching the surface' in nonprime RMBS

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Nonprime mortgage securitization has picked up considerably this year, with several new sponsors pooling these loans into collateral for bonds, many of them publicly rated. But lenders are only doing a fraction of what is possible, according to panelists at ABS East.

Matt Nichols, chief executive of Deephaven Mortgage, said that the single limiting factor on the market is not investor appetite, but the supply of loans. “It comes down to the individual loan officer; is he going to make the decision to sell,” Nichols said.

"Even if it’s a great product for the consumer, there is an intrinsic block in the mind of the lender,” he said. “There’s a risk-adjusted rate out there for someone," but "the return of risk-based pricing takes time to adopt at the loan officer level."

Consumer awareness is also a limitation, according to Steven Schwalb, chief executive of Angel Oak Home Loans. “We’re in the first or second strikes at the bottom of the first inning of a nine inning game in terms of consumers becoming aware” Schwalb said. “We’ve just scratched the surface in terms of consumers being aware.”

Dane Smith, managing director Invictus Capital Partners, thinks there are about 1 million loans a year that are not getting done. While a lot could go the Federal Housing Administration, which insures loans with low down payments and offers easier credit qualifying that Fannie Mae or Freddie Mac, “it’s not unreasonable to expect that this market could grow to 10%" of the private-label market in the next five years, Smith said.

The panel took place shortly after Fitch Ratings published a report raising concerns about one type of loan all three lenders have been making to self-employed borrowers. So-called bank statement loans programs allow these borrowers to verify their income using between 12 and 24 months of bank statements. To date, these loans have actually outperformed nonprime loans that rely on more traditional methods of verifying a borrower’s income, such as a tax return. Yet Fitch assumes that bank statement loans have a “meaningfully higher” risk of default.

Suzanne Mistretta, a senior director at Fitch and another panelist, outlined another concern the rating agency has with nonprime mortgage bonds: the representations and warranties made on the loans used as collateral. The rating agency is concerned that they “sunset,” or go away, too soon, and that deals lack adequate enforcement mechanisms.

This does not appear to be holding the market back, however. “If investors are concerned, it’s not showing up in pricing,” said Chris Helwig, managing director Amherst Pierpont, and another panelist. “Execution has been “phenomenal, up and down the credit stack.”

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RMBS Subprime lending