Resurrection of RMBS

[jay21]

Here's a good recap of and outlook for the mortgage market:  https://www.economy.com/mark-zandi/documents/2013-06-26-Resurrection-of-RMBS.pdf

 

"It would not take much of an increase in g-fees to significantly change the arithmetic in the mortgage market. At the government-sponsored enterprises’ current g-fees, the cost of issuing private RMBS is competitive only for securities backed by very high-quality loans with LTVs of below 70% and credit scores of more than 740. This includes no more than 15% of the purchase mortgage loans currently being bought by

the GSEs. But if the g-fees were increased by only an additional 20 basis points, then private RMBS would be competitive to fund mortgage loans up to an 80% LTV and down to a 700 credit score. This would include two-thirds of the GSE’s current lending (see Table 2)."

 

"A less likely but helpful reform would be  a national, nonjudicial foreclosure process. Foreclosure is currently governed by state laws, which vary considerably. Approximately half the states have nonjudicial foreclosure processes, while the other half send foreclosures through the courts. During the housing crash, this discrepancy severely complicated loan modification efforts by both the federal government and by national mortgage companies. The process lengthened in judicial states as the volume of foreclosures surged, stretching beyond 800 days on average in

Florida, and beyond 1,000 days in New York (see Chart 5). The lengthy process significantly increased the cost of foreclosure to all parties."

 

"Mortgage credit is not nearly as tight as it was during the recession or in the early years of the recovery, but it remains tight by historical standards. Among first mortgage loans originated in the first quarter of 2013, nearly 90% went to borrowers with credit scores above 700, the national average. Only about 5% went to subprime borrowers with scores below 660 (see Chart 6). At the peak of the housing bubble, closer

to half of all loans went to borrowers with scores above 700; more than a third went to borrowers with subprime scores. Underwriting standards were clearly too easy during the bubble, but they are clearly too tight now."

 

"With trend mortgage origination volume of $900 billion, and the private RMBS market expected to provide funding for 10% to 15% of originations, private RMBS issuance should be $90 billion to $135 billion per year. It will take a few years for issuance to ramp up, given the issues that need to be ironed out. Private RMBS issuance is expected to slowly but steadily increase from $15 billion this year to $40 billion in 2014, $90 billion in 2015, and $125 billion in 2016 (see Chart 8).12 This is nowhere near the pre-crash volumes that topped $1 trillion annually, but it constitutes a rebirth nonetheless."

 

 

Few comments:

 

Mortgages are still very tight with almost no exotic mortgages being issued.  Bank's RE portfolios should be in great shape.

 

PL RMBS are getting competitive with agencies and a slight increases in g fees can cause the market to come back.  More available credit can mean home prices increase even more than people are expecting.

 

Liquidation timelines are much longer than I think people anticipated due to the involvement of the courts in judicious states.  I think people need to consider this when reviewing BAC's progress on their legacy portfolio.