The overall performance of reinsurance deals backed by U.S. mortgage insurance-linked notes (MILN) continues to improve as delinquencies have declined, bond credit enhancement has increased and market volatility has kept deal volume at bay, according to a new report from DBRS Morningstar.
"Key credit variables stayed on-trend year-to-date," said Mark Fontanilla, a U.S. residential mortgage-backed security consultant at DBRS Morningstar. "Delinquencies have been steadily improving, 180-[day]-plus delinquencies on a nominal basis continue to decline, and B-piece writedowns remain minimal."
Total delinquencies for most transactions issued prior to the coronavirus pandemic fell 1% for on-the-run transactions and 0.6% for seasoned transactions. The delinquency rate for transactions issued during the pandemic stands at 0.84% on average.
As borrowers continue to exit forbearance, the 180-plus-day delinquency rate has marginally declined to approximately 2.4% of the aggregate exposed principal balance, as the total number of loans has fallen 9.5% to 12,103.
And modification and foreclosure activity has remained subdued, according to the DBRS Morningstar report, "U.S. RMBS August 2022 MILN Sector Overview," authored by Fontanilla, Yash Shah, Kartika Kankariya, Jinesh Chheda, Sagar Kongettira and Quincy Tang. The report is based on deal performance as of August 25, 2022.
Bond credit enhancement (CE) continues to increase steadily, the report found. Senior CE for on-the-run transactions issued prior to the pandemic is about 3.5 times the senior CE target, compared to nearly 2.3 times higher for seasoned transactions issued prior to the pandemic. The CE for junior-rated bonds also remains healthy at above the 60-plus-days delinquency levels.
"Bond credit enhancement has benefited from historically higher-than-average prepayment speeds, along with low realized losses despite COVID-related rise in delinquencies from the past few years," explained Fontanilla, in addition to home price appreciation and decent economic trends.
Fontanilla expects the credit enhancement to continue to follow current trends, "unless delinquencies start spiking again, and realized losses increase quickly and dramatically."
Higher credit enhancements will obviously result in better loss protection for issued bond classes, he said.
Despite persistent improvements, the MILN deal volume cooled off compared to recent years.
"MILN historical issuance year-to-date is roughly $20 billion in issued securities," Fontanilla said. "New deals have not surpassed $1 billion after amounting to about $6 billion in 2021, the highest annual total so far."
Higher issuance cost execution due to market volatility has likely kept the few sector issuers in the space on hold, he said. Another possibility is that they have other risk transfer options that may be more cost effective under current market conditions.
