March 22 (IFR) - Private-label residential mortgage-backed
securities (RMBS) could be making a slow comeback in the US
structured finance market following two new deals from bank
issuers this week.
While there is no chance of volumes returning to the peak
levels seen before the financial crisis, there has recently been
a clear uptick in activity in the sector.
On Thursday, JP Morgan issued its first private-label deal
since 2007 - a US$570.7m transaction. More than 60% of the
deal's collateral consists of mortgage loans originated by the
Mid-sized Florida lender EverBank was also in the market
yesterday, making its debut as a private-label RMBS issuer with
a US$308.4m transaction. The bank was selling notes backed by
collateral comprised of 15-year and 30-year mortgages.
Meanwhile California-based REIT Redwood Trust is in the
market with its fourth RMBS of the year, and Credit Suisse is
also prepping a deal.
And industry participants are expecting more offerings in
the weeks to come.
Investment bank residential mortgage conduit platforms, such
as the one managed by Wells Fargo, have been extremely busy
buying loans and sourcing residential-mortgage collateral over
the last six months. Wells Fargo and other large banks are
expected to make a return to the market this year.
Additionally, Shellpoint Partners - a company formed in 2010
with an investment from mortgage bond pioneer Lew Ranieri
through his private equity firm Ranieri Partners - will be using
its New Penn Financial origination platform to issue RMBS backed
by mostly high-quality prime collateral, according to an SEC
filing from last October.
Prior to this week, only Redwood Trust and Credit Suisse had
issued private-label RMBS since the onset of the financial
"We expect increasingly more of these private
securitizations in the coming quarters, and such would be an
undeniably favorable circumstance," said Chris Sullivan, chief
investment officer of the United Nations Federal Credit Union.
"That's because it would suggest that housing market
fundamentals and extensions of mortgage credit are both
continuing to improve, and government dominance in what should
more appropriately be a more balanced market is actually
SHADOW OF ITS FORMER SELF
Mortgage market experts say the return of private capital
through non-agency securitization, backed by high quality loans,
is expected to provide a boost to the US housing market.
But while the new deals are encouraging, industry experts
expect private RMBS issuance to remain a shadow of its former
self over the next two years.
More than 95% of US mortgage finance is still currently
handled by Fannie Mae, Freddie Mac, Ginnie Mae, and the FHA.
Industry experts say that while the addition of two new
entrants to the non-agency space is a welcome sign of momentum,
the low overall volume means private RMBS is purely a niche
Out of approximately US$1.8 trillion in overall mortgage
origination volume in 2012, only about 10% - or around US $180
billion - was non-agency and eligible for securitization.
And only about US$5 billion of that - all backed by prime
mortgages - was actually securitized last year, according to
Fitch. The rest was kept on bank balance sheets.
By comparison, in the peak years of 2005 and 2006,
approximately US$1.5 trillion of non-agency collateral was
eligible for securitization, according to Fitch - and nearly all
of that was securitized.
"Yes, there are two new names in the private-label market
now, but volume is coming off of a very low base," said Rui
Pereira, the head of RMBS ratings at Fitch.
"Banks are predicting between US$15bn and US$25bn of
private-label issuance this year. Even if that does come to
fruition, it's still just a small fraction of where this market
used to be."
Pereira said that the industry still needed to become
comfortable with several regulatory issues, including the
Consumer Financial Protection Bureau's recently finalized
"Qualified Mortgage" definition, which may differ somewhat from
the forthcoming definition of a "Qualified Residential Mortgage"
being crafted by federal regulators.
The CFPB in January also released final rules detailing
national mortgage servicing standards, which the industry is
"New entrants will test the waters this year, but
private-label RMBS remains a niche market," Pereira said.
WEAKER INVESTOR PROTECTIONS
One factor slowing development of the market is that
investors are starting to push back over provisions in deals
that protect banks from lawsuits and loan repurchase obligations
if a deal's loans go sour.
Fitch said that the so-called representations and warranties
(R&W) framework of this week's JP Morgan RMBS transaction was
"significantly diluted by qualifying and conditional language
that substantially reduces lender loan breach liability and the
inclusion of sunsets for a number of provisions including
While older R&W provisions and repurchase obligations were
for the life of the loan, some recent RMBS proposals contain
"sunset provisions" that free lenders from repurchase
obligations after less than 36 months.
"I think investors need to pay careful attention to the
language surrounding lender liability for redress, even though
today, arguably, one might expect the banks to deliver a
substantially better-quality product -- especially among the
earliest, heavily scrutinized deals -- than was their previous
practice," said the UNFCU's Sullivan.
Fitch said that it considered this weaker R&W framework when
it determined its expected loss estimation and credit
enhancement analysis for the JP Morgan deal.
The agency warned the market last month over these new RMBS
provisions, which it said may expose investors to added risks
from weak underwriting and shoddy mortgage loans.
"These provisions begin to introduce subjectivity and may
burden a mortgage trust with additional risks and expenses,"
Fitch senior director Suzanne Mistretta wrote in February.
Fitch said that this week's JP Morgan deal is missing reps
for early payment defaults. Additionally, certain other reps
include knowledge qualifiers, meaning that buyers may have the
burden of proof to show that sellers knew that certain loans
might be prone to souring.
The JP Morgan transaction contains materiality conditions,
including language that calls for a determination of whether a
default was the result of a life event or a breach of contract.
All of this did not deter Fitch from putting a Triple A
rating on the senior tranche, albeit with higher-than-normal
"Fitch believes the 7.4% 'AAAsf' credit enhancement in the
transaction sufficiently addresses the risks in the deal
including the weaker R&W framework," analysts wrote in their
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