Private-label MBS issuance to hit a post-crisis record in 2022

Another post-financial crisis record for private-label residential mortgage-backed securities is expected in 2022, with issuance expected to increase 15% over this year, a Kroll Bond Rating Agency report said. However, the ability for the investment banks to handle the capacity could affect the market.

The largest segment of PLS deals — prime — is expected to remain flat at best year-over-year following the Federal Housing Finance Administration's suspension of the purchase caps. This segment could also be affected by the FHFA's expected increase to the conforming loan limits. Already, some lenders have raised their own limits in anticipation.

KBRA predicted $132 billion in PLS issuance for 2022, including $78 billion in prime, $34 billion in nonprime and $21 billion in government-sponsored enterprise credit risk transfer deals.

The rating agency raised its 2021 expectations by almost $20 billion to $115 billion, more than double the pandemic-affected year of 2020. This includes $78 billion of year-to-date issuance bolstered by $38 billion in transactions predicted in the fourth quarter, a new post-crisis record for a quarter.

But the issues affecting the U.S. economy — particularly labor shortages, supply chain issues and inflation — could counter the low interest rate environment that’s supporting the home purchase market.

"Aside from performance and investor appetite, which could see volatility due to the aforementioned economic trends, capacity concerns across the RMBS supply chain will be a key driver of origination and issuance," the KBRA report from Armine Karajyan, Jack Kahan and Eric Thompson, said. "All areas of the PLS ecosystem suffered growing pains in support of the volume increases obtained in 2021."

Nonprime issuance should increase by 26% year-over-year, as the spreads are expected to normalize after rising precipitously at the end of 2021. Kroll expects agency CRT transactions to increase by 53%, as a result of likely future changes to the GSE capital framework expected to be favorable for these transactions, which also led Fannie Mae to return to CRT issuance earlier this year.

Capacity issues affect KBRA's issuance projections. "While all areas struggled, many pointed to third-party review firms as causing delays in RMBS issuance," the report said. "This, combined with sharply increasing volume, led certain issuers in the prime sector to steadily move away from 100% diligence toward a statistical sampling approach for loan level reviews."

While statistical sampling is conceptually sound, its effectiveness is tied to the rigor of the approach — things like the sample size, selection process and handling of findings all impact the reliability of those results as it pertains to the loan as a whole. So "KBRA continues to monitor the ongoing trends in this area."

The "esoteric" subcategories of PLS issuance that should increase in 2022 include reverse mortgage, mortgage servicing rights-backed issuance, home equity line of credit-backed deals, private label CRT and Ginnie Mae early buyout transactions.