With securitization's future paved with uncertainty, coming up with an estimate of what RMBS volumes will amount to depends on a number of variables.
ABS market players discussed these factors yesterday at the American Securitization Forum's sunset seminar on RMBS' future role.
What is certain is that the landscape for non-agency RMBS has dramatically changed. Given the variables that banks must contemplate, it is unlikely that 2011 will see a sudden surge in mortgage origination.
"It's really a tale of two markets," said Paul Jablansky, managing director and senior non-agency MBS and consumer ABS strategist at the Royal Bank of Scotland (RBS)."We have the best of times in the secondary and in a sense the worst of times in the primary market."
Of the $48 billion of issuance so far in 2010, RBS estimated that $44 billion was re-remic activity and thus did not reflect the origination of new mortgages.
But according to Baron Silverstein, managing director at Bank of America Merrill Lynch, banks still have the capability of originating non-agency mortgage and borrowers can still get loans from any number of financial institutions.
"Today it's not impossible for many people who are buying nonconforming mortgages to get a loan and in fact if you make a comparison, banks are competing and looking to drive down spreads," said Silverstein, who added that borrowers could get rates as good as 5% in some cases. "It's very cost effective rates in today's market."
Making the case for the cost effectiveness of securitization in the current market environment, however, is more challenging.
Silverstein explained that the cost of origination — that is the cost of making a loan versus where a bank would be able to execute in the non-agency market today — has so far proved not to be the best funding strategy. Banks instead feel more comfortable raising corporate debt and use that capital to fund more mortgages.
"When you look at securitization in the non-agency space, because of the dislocation of the market and the inability to easily access the market and because bank's have excess funding liquidity ,it means that banks are more comfortable just holding onto mortgage assets and holding onto that risk," he said.
The story improves when you look at performance of secondary market trading. This side of the securitization market has seen tremendous performance. Additionally, the technicals have been positive and the market has see extremely robust returns, Jablansky said.
Jablanksy also pointed out that the credit trends have been positive with deterioration happening at a much slower pace than originally anticipated.