The RMBS private-label market will continue to be stalled by the still-weakened housing market, according to a Standard & Poor’s report. The release also warned investors not to mistake a potential flurry of issuance in the coming months with a lasting recovery.
“We believe there may be hope for modest private-label RMBS activity in the short term, however," S&P analysts said. "Once the temporarily raised conforming loan limits for high-cost areas fall on Oct. 1, 2011, we expect that there should be some private-label prime Jumbo issuance in subsequent months. We also expect that additional activity should emerge if and when the covered bond legislation is enacted, which might be in 2012.”
The report stressed the importance of covered bonds in the interim before the housing market recovers, referring to them as “long-term liquidity sources for mortgages”.
As detailed by S&P, one of the best hopes for a private market recovery is the Treasury’s proposed goal of minimizing the role of GSEs to decrease competition from the government for private-label RMBS. Over 90% of current mortgage loans are originated by GSEs.
However, this is not an immediate remedy as any GSE exit plan would be complicated and prolonged due to the fragile current state of the housing market, S&P said.
The report also expressed uncertainty concerning the affects of the proposed risk-retention rules on the housing market. While rules such as the new qualified residential mortgage (QRM) underwriting standards may hurt the private-label market by limiting potential borrowers and available mortgages, these regulations may also stabilize housing prices and the market in general.
Another important factor preventing private-label growth listed by S&P was the large shadow of inventory of unsold homes that continues to plague the housing market recovery as a result of “weak existing home sales and a difficult labor market”. The report stated that this could continue to depress home prices as well as the private-label RMBS market.
Furthermore, S&P said that while private-label RMBS will eventually reemerge, the industry will be vastly different than before with more emphasis on tighter underwriting and lower issuance volumes.
Other key issues listed were low investor confidence in mortgage servicing standards and low mortgage rates.