Moody’s Investors Service says that higher interest rates will slow mortgage refinancings but boost purchase loans in residential mortgage-backed securitizations.
That’s good news for RMBS deals because purchase loans, which are generally offered to high credit quality borrowers default at a lower rate than refinance loans, explained Moody’s in a report published today.
Moody’s said that purchase mortgages tend to perform better because “originators have typically subjected purchase loan borrowers to stricter credit reviews and property valuations” when compared to refinancings.
Freddie Mac and Fannie Mae’s purchase mortgages originated between 1999 and 2008 have generally defaulted at lower rates than the refinance mortgages in their portfolios, particularly those mortgages originated in the years leading up to the financial crisis. Jumbo mortgages in private-label securitizations have also followed similar trends, with purchase mortgages defaulting at much lower rates than refinance mortgages among those originated just before the financial crisis.
The market is likely to see an increase of purchase loans in RMBS pools over the next several years as a result of rising mortgage rates. Refinancing volumes on the other hand will remain low because higher rates make refinancing less appealing for homeowners.
Moody’s said in the report that the trend is already evident even in current rate environment (which are still fairly low in historical terms). The average 30-year mortgage rate rose to 4.46% in December 2013 from 3.41% in January 2013 and applications for mortgage refinancings fell by 67% to their lowest level since 2008.
The trend could also explain why Redwood Trust's RMBS deals issued in the second half of 2013 saw purchase loans jump to an average of 54% from from an average of 26% in the first half.