It is safe to say that securitization professionals will not miss 2008, and market participants fear that 2009 does not look much brighter.
Activity in the RMBS sector remains at a lull, with mounting economic pressures yielding a continuingly bleak housing market.
"With unemployment rates rising, and expected to continue to rise into 2009, there are going to be more and more people who won't have those income streams, and that is going to put stress on them and their ability to pay their mortgages," said Mark Fleming, chief economist at First American CoreLogic.
As of November 2008, 34.4% of securitized subprime loans were 60+ days past due, according to a report last month from Credit Suisse. This is more than twice the delinquency rate one year ago, the bank's analysts said.
Also on the rise were foreclosures, which stood at 13.8% in November across all securitized subprime loans. This was almost double compared with the year before and a 2% increase from the previous month. Severities stood at 57% last month, Credit Suisse analysts said, but rose to a whopping 87% in Michigan and Ohio.
Furthermore, household savings are near their all-time record lows while total debt service is near its all-time high, Deutsche Bank Securities analysts said.
But there might be a glimmer of hope despite expectations of continued losses - the pace of delinquencies has started to slow. "From the data reported to us, delinquencies continue to rise, for the most part, but the rate of growth is slowing down," said Frank Parisi, chief criteria officer in the RMBS group at Standard & Poor's.
For example, reporting trends in the 2005 subprime vintage show delinquencies are flattening out and might have even come down a couple of basis points, Parisi said, although performance varies month to month. "If there is an optimistic note, it seems that deterioration is slowing down," he said, "but again, we don't see the market hitting bottom until perhaps mid-2009, so the problem isn't over yet."
Dan Ferris, executive vice president in capital markets at NetMore America, a professional retail and wholesale mortgage bank based in Walla Walla, WA, also predicted the housing market would not bottom out until mid-2009. "It will be mid-to-late spring before we see some stabilization take place and people begin to get more comfortable," he said.
Fitch Ratings projected that home prices will decline 10% on average over the next five years, on a nominal basis, which is heavily weighted toward 2009 and also the first half of 2010. Overall, that would mean a peak-to-trough decline of 30%.
The Fitch-rated RMBS universe contains a lot of loans made in California - 37% of all loans total - and Fitch is predicting an additional 25% decline from the present values for California on a nominal basis, said Huxley Somerville, RMBS group managing director at Fitch Ratings, on a call last month. This would mean a 51% peak-to-trough decline for California, Somerville said.
Better Loans, Worse Conditions
Interestingly, despite a tightening of credit, the 2008 loan originations are performing as poorly as the 2006 and the 2007 vintages, Fleming said. While these loans are most likely better in quality, the problem is that they are being originated in an even more distressed environment, he said.
With worsening macroeconomic conditions putting further pressure on the housing sector, Alt-A and prime RMBS performance face mounting losses in 2009.
"Up until recently, RMBS performance has largely been a function of home price decline, and further price decline is obviously going to effect mortgage performance in 2009," Somerville said. "However, since September, there has been a vastly more negative economic outlook (Fitch is forecasting an over 8% unemployment rate by 1Q10). That negative macroeconomic dynamic still has to work its way through mortgage performance, and we will see that happen in 2009."
Fitch expects a significant number of downgrades to come for Alt-A and prime RMBS 2005 to 2007 vintages, and throughout the capital structure from triple-A downward. However, after these actions, the ratings for these securities should be stable in 2009, outside of deal-specific issues.
Indeed, the growing impact that the broader economy will play in mortgage performance for 2009 may cause the differences between prime and subprime/Alt-A delinquencies to shrink, with Alt-A/subprime bonds outperforming as a result, Deutsche Bank Securities analysts said in a recent report.
Home prices have declined to mid-2004 levels, and this could put a substantial portion - 70% to 80% - of the mortgage market underwater, the analysts said.
But mounting losses across all segments of the RMBS market are not shocking. "Every segment is being hurt by these stressed situations," Fleming said. "From an RMBS perspective, I would expect in these pools of loans behind private-label RMBS that there is going to be further foreclosure and delinquency in 2009, but I don't think that is going to come as a surprise to anyone."
A Simpler 2009
Deutsche Bank analysts predicted a return in 2009 to the simpler MBS market of 20 years ago, with 30-year fixed rate mortgages as the predominant product, little or no non-agency securitization, Ginnie Mae dominating net issuance of MBS, and fewer leveraged mortgage investors. The bank analysts are projecting a net issuance of $30 billion per month in the fixed-rate agency sector including GNMA.
Others, including Helene Decillis, chief operating officer of Lend America, a privately-owned, direct-to-consumer residential mortgage lender, also expect new origination to be primarily concentrated in FHA loans.
Ferris expects that 90% to 95% of new origination will be in the Fannie Mae, Freddie Mac and Ginnie Mae markets.
But the nonconforming jumbo market also remains non-existent for the foreseeable future.
"The nonconforming market today is made up of portfolio lending and they have only got so much money that when it runs out they have to raise rates," Ferris said.
There also remains a paucity of warehouse lenders. "We are seeing what should be a huge refinance boom because rates are so low. But the lack of financing limits how much volume lenders can do at one time because they need to be able to clear out their warehouse lines," said Decillis.
Better Buying Opportunities
However, there are some bright spots. House price declines are creating greater affordability for homebuyers, according to Decillis.
Also, the U.S. Department of Treasury and the Federal Reserve recently said that they were going to buy MBS, while also lowering the lending rate again, which moves together have buoyed mortgage prices, Decillis said.
On the RMBS side, there are deals out there if investors have the cash and the willingness to better understand the risk.
Loan modifications also provide potential relief for the housing sector, but there is still the rising threat of re-defaults, and there are limits to the modifications' effectiveness, market participants agreed.
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