The private-label RMBS market may experience a quadrupling in volume in 2013 over 2012 as issuers see more favorable terms and at least two major banks are expected to regularly issue deals backed by pristine jumbo loans. Even so, no one's expecting to see much deterioration in the quality of collateral.
There has been much talk about at least two major banks as well as additional real estate investment trusts (REITs) approaching the market even before the end of this year. According to John Sim, head of non-agency MBS research at JPMorgan Securities, not only will JPMorgan and Bank of America start issuing private-label RMBS soon, but they are likely to issue them regularly throughout 2013."I suspect you'll probably see something every other month, maybe every month, starting in January or maybe sooner," Sim said, adding that the deals are likely to be between $500 million and $1 billion each in size.
Sim said that could bring their combined tally to upward of $12 billion, and the usual suspects, such as Barclays and Credit Suisse, may join the party. If REIT issuance stays at 2012's level of $5 billion or exceeds that number next year, total private label issuance could reach $20 billion, most of it based on fresh collateral. That is a major bump up given 2011's volume was a mere $2.8 billion, and much of that stemmed from re-remics, or repackaged securities. Those deals all but vanished in 2012 because of the punitive capital charges they will incur under upcoming Basel III rules.
The only regular issuer since 2010 has been Redwood Trust, which brought a handful of deals throughout 2010 and 2011 and has picked up the pace this year, when it is expected to complete six transactions. Springleaf Financial has been another significant issuer this year, completing three RMBS deals that securitized seasoned mortgage loans, often from earlier securitizations. And there have been a few deals stemming from nonperforming loan trusts, such as a recent $186 million nonperforming loan deal by Vericrest Financial.
The bulk of issuance over the next year, however, is anticipated to resemble Redwood's deals and comprise higher quality prime mortgages. In October, Shellpoint Partners filed a shelf registration with the Securities and Exchange Commission and it is expected to issue RMBS pooling high-quality loans, just a notch below the pristine jumbo loans that have comprised Redwood Trust's Sequoia deals.
Also gearing up for a deal as market conditions have turned more favorable for issuers is Two Harbors Investment Corp., which noted in a recent filing that it has collected $335 million in loans or loan commitments. Bill Roth, co-chief investment officer, said the firm is likely to pursue an RMBS deal "sooner rather than later," since spreads on 'AAA'-rated tranches have tightened and the credit enhancement required by the ratings agencies as lessened somewhat.
Nevertheless, Roth said GSE loan limits have been nudged lower, home values remain relatively flat, and housing activity is still low. "So several parts of the equation haven't changed much, but demand for 'AAA' [securitized bonds] has picked up and credit enhancement levels make securitization more economically feasible," he said, noting that the credit enhancement on Redwood's most recent deal was a bit over 7%, down from the mid-7% range for the previous year's deals.
A securitization from Two Harbors would also pool pristine, mostly jumbo mortgages, and RMBS market participants see little deterioration occurring from the standard established by Redwood. Its deals have had average FICO scores of 770 and loan-to-value ratios (LTVs) of 67% or 68%, according to Glenn Costello, senior managing director responsible for ABS and RMBS ratings at Kroll Bond Rating Agency.
Although an increase in issuance is often accompanied by deterioration in credit quality, "I would say if there's any move at all it will be very incremental, aside from pooling of very seasoned subprime loans," Costello said.
Roth concurred, noting, for example, that LTVs could certainly drift slowly upward, "but in the near to immediate term, so over the next year and maybe even the next three years, I think securitization is going to be the domain of the best credits."
Although the private-label RMBS market appears likely to grow significantly next year, further growth and especially expansion into deals securitizing less pristine loans will likely be inhibited by a lack of clarity around numerous regulatory initiatives. These include the risk-retention rule stemming from Dodd-Frank as well as the definitions of a qualified mortgage
"Until we get some of the regulatory overhang behind us, private-label RMBS is unlikely to become a major source of new-issuance flows for investors in the structured finance market," said James Grady, managing director at Deutsche Asset Management.
