Many have argued that loan quality today has got to be better than the last time anyone issued new private-label RMBS on a regular basis, and now how much better has even been publicly quantified, which could add to momentum for new issuance.
We got some new numbers on this last week because Fitch Ratings recently looked at a sample of about $350 billion to $400 billion in securitized loans from private-label deals issued between 2005 and 2008, a little under $50 billion of which were underwritten within today's FICO and LTV limits.
Fitch also looked at "distinctions in home price environment" in terms of whether the state involved had a less-than-10% decline, a 10% to 30% decline or a more than 30% decline with the range defined by the highest to lowest points on the Case Shiller home price index at any point since 2005. "The few states that did not experience a home price decline were included in the less-than-10%-decline cohort," the rating agency noted.
"While there are limitations to using aggregated historical behavior for guidance on the future behavior of newly originated loans, it is apparent that prime loans with credit attributes similar to those being originated today have historically performed significantly better than the prime sector as a whole," Fitch said.
In looking at these loans' performance through the January distribution date, Fitch found loans written within the bounds of recent underwriting had delinquencies of only about 4.5%.
Those outside the lines had roughly three to four times as many delinquencies (16%).
Fitch also found loan losses to date for "traditional" loans were just 19 basis points, as compared to 98 bps for the overwhelming number of "nontraditional" loans originated during that period.
Fitch analyst Grant Bailey said this might even be understating the improvement in performance from today's tighter underwriting since the study didn't look at other criteria that have improved recently such as time on the job, cash reserves and increased caution when it comes to first-time homebuyers with limited credit histories.
True, economic uncertainties persist, he said, noting that home prices and unemployment trends are still largely negative. But they are still more stable than between, say, 2006 and 2008.
Does all this make today's loans attractive enough to securitize? As of press time last week the jury was still out on the answer, in part because it continues to be tough for investors to put a number on the risk of proposed regulation.
"I think the issuers are still weighing the economics of it," Bailey said. "They're still uncertain that it would make sense financially at this point and there are also the regulatory uncertainties with the risk retention rule (as well as how that would effect) their ability to move assets off balance sheet."
For these reasons and others, Fitch said in its study it believes "whole loan residential mortgage securitization is likely to remain limited in 2010," but its analysts still think "the heightened standards and increased transparency of new transactions should help further the process of restoring confidence in the sector."
In other news, confidence has been increasing when it comes to the prime credit end of the nonagency market, according to David Adamo, CEO of Luxury Mortgage Corp., Stamford, Conn. He said he is seeing for the first time in two years a relatively high level of investor interest in superjumbo products with balances of $1 million-plus.