On August 22 in New York City, Global Capital hosted a RMBS roundtable to discuss the state of US RMBS and housing finance. Read selected excerpts from the roundtable below. For complete roundtable coverage, download the PDF.
A decade after the financial crisis, the US RMBS landscape looks very different. At a fraction of its former size, the private label market is now a mashup of a range of asset types representing risks across the credit spectrum, and while banks have yet to jump back into the sector, non-bank and alternative lenders are moving quickly to meet investor demand.
The market in 2017 is a mix of non-performing and re-performing loans, non-prime and non-QM, prime jumbo and agency credit risk transfer securitizations, and even though volume has been low compared to the pre-crisis heyday, observers are pointing to growing strength in the US housing market as a driver of more issuance and increased RMBS demand from fixed income investors.
As millennials start to move out of the basement and into their first homes, the 75m people between 18-34 are expected to drive new home formation in the US. This comes at a time of historically low housing supply, which should provide a boost to home prices in the coming years.
And yet, many in the market note that credit availability is not keeping pace with growing demand for housing. In addition to dealing with the lasting effects of the financial crisis, US mortgage lenders have been slower to adapt to new technologies that other parts of the financial services sector have embraced. Fintech has the potential to increase the efficiency of the mortgage underwriting process, but could also open lenders up to new issues with regards to regulatory disclosure and reps and warranties.
GlobalCapital gathered a panel of experts in its New York headquarters to discuss the prospects for the US housing and mortgage market and the potential for growing the universe of private label RMBS.
Global Capital (GC): I’d like to begin with a brief overview of what you’re seeing in US housing and mortgage market fundamentals and how you’re seeing things going for the rest of 2017.
Sonal Patel, BNY Mellon (SP): From my perspective, I think that the mortgage market overall is very strong. I think we’re seeing a lot more investor confidence, especially in the new deal flow seen in the past two years or so. There’s a lot of ancillary surveillance around the collateral performance that’s being provided for the investor base. That’s providing additional confidence. I also agree with Sam about the millennial population. I think the dynamic and the mind set has changed a lot. I think there are going to be other products offered, and keeping the cost of down payment low is going to be very beneficial for the millennial population. In terms of the securitization market, we see a strong ongoing positive trend. There are a number of regular issuers who are working on their second and third deals this year (or more). The investor base has changed and the GSEs are paying attention, which is huge. We shouldn’t underestimate the significance of the GSEs’ influence in today’s market; that’s really important as the market and regulatory environment evolves because I think there’s going to be a lot to see in this space.
GC: Do you think that the rental market and the shifts towards renting, particularly among millennials, is an impediment to growth of home ownership in the US?
SP: I wouldn’t say that. While I think the rental market is still pretty hot, it’s not as affordable versus ownership in the various states that we’re talking about.
GC: So if we agree that housing fundamentals are fairly strong at the moment, what in your view could potentially hinder that? Where do you see the problems or the obstacles for housing right now?
SP: As one of the largest RMBS trustees who has the benefit of our market position and perspective throughout the pre-credit crisis and post-credit crisis eras, we are still encountering transactions post-crisis where the risk factors were not taken into consideration around quality control at the outset. In this new age of the mortgage market, it is critical for all participants that quality diligence is being done appropriately. Progress has definitely been made on this front, but consistency is still needed across the market; I think that’s one of the biggest factors to consider as the market evolves. There’s various programmes around the mortgage industry that people are trying to securitize. From a risk perspective, we see market appetite focused on traditional structures with good quality collateral, just because I think that’s where there’s more confidence. That’s just from our perspective, because of what we see in terms of various issuers, or banking institutions trying to securitize – I think the market is expressing a keen interest to avoid the problems and challenges of the past.
SP: I think the investor profile has changed. Today’s investors are asking for more – information, transparency, and access. And not just from the issuer side, but also from service providers. I think their demands are creating more confidence in the market.
GC: We’ve mentioned the CFPB and some of the regulatory issues. Do you think CFPB and what it does being under more scrutiny from the current administration poses a threat to the mortgage underwriting process? If there is less oversight of underwriting, how are you all thinking about that?
SP: I agree. I think that if the provisions of Dodd Frank and CFPB are loosened from an oversight perspective, it could have a positive impact. I think the current environment is over- regulated, from my perspective; some sort of loosening of some of those regulations could have a positive effect.
GC: That brings us to a discussion about the investor base for some of the RMBS deals that we are seeing come to market. Sonal, you mentioned the GSEs are responding to changes in the investor base. So who are these investors and where do you see the trends in the investor base coming and going?
SP: It’s not just the investor, or the profile of the investor that has changed. I think investors are also under increased scrutiny around the type of paper that they hold. Investors themselves more regulated, hence why they’re demanding more information and due diligence – including collateral quality and securitization mechanics. So I think the fundamental dynamic has changed, because investors need to apply additional scrutiny for their own institutions, either from a banking perspective or just the fund market.
GC: With regards to the deals themselves and the outlook for issuance, what are you seeing as the engine of private label RMBS issuance and its resurgence in 2017 and beyond?
SP: Yes, our projections for non-QM have been about $3bn for 2017. For last year it was $1bn. And so the forecast for 2018 is projected to be higher, and we definitely think that from a non-QM perspective that’s where you’re going to see a little more issuance.
GC: And is there something that would bring banks back to the non-QM sector or is that just not in the cards for the foreseeable future?
SP: I also wanted to add that for the most part, the underwriting process is still very manual. It’s still very paper- based. I think that there’s still this evolution of electronic disclosure, electronic files, electronic information that can be much more accessible to the community. I think that that part of the process still has to evolve, to really provide a little more quality diligence with the innovation and the technology that exists today. As the mortgage market continues to develop, mature and evolve, the technology and innovation around the underwriting needs to evolve as well.
GC: To what extent would improvements in technology increase the speed of loan origination?
SP: Fintech’s been a huge disruptor in terms of the capital markets in general. So you would think for the mortgage market and the housing industry that it would really provide the same sort of avenue of disruption.
GC: To close us out, GSE reform is something that people have been really keeping a close eye on since the crisis. What are your thoughts here? CRT has come along and people are now thinking that this may be what GSE reform looks like. What are your thoughts on how the GSEs move forward from here?
SP: I think also the success of CRT is filling a gap in the private label market. So I think that it’s overshadowing the process of the reform a little bit, which is good, but we’ll see the continued success when the PLS market does actually come back.