Michael Franco, CEO of a third-party due diligence review company SitusAMC, explained that it typically takes two to three months for loans issued in the primary market to work their way through the residential mortgage-backed securities (RMBS) pipeline. “Therefore, you would expect the securitized loans in transactions during the first quarter of 2022 to have been largely issued at the end of 2021,” he explained.
But the precipitous rise in interest rates over a very short period — up 1.5 percentage points in the past three months — has made it difficult to price PLS transactions profitably for some issuers, according to Weng. The volatile rate environment affected trading volume in the first quarter of this year, although it exceeded the mark set in 2021 over the same period.
This is likely to continue to impact the number and volume of PLS transactions in Q2 as long as rates continue to rise. This is due, in large part, to the fact that many of the mortgages pooled for PLS transactions were originated two to three months ago at rates below current market rates.
“We’re starting to notice that because there’s just too much supply in the market, and because of inflation and the expectation that the [Federal Reserve] will raise rates, that investors demanded a higher coupon,” Weng said. “And obviously when your mortgage pool has a lower [interest] and you also have to cover some costs, a higher coupon translates to a higher funding cost for issuers.
“So we’ve seen some push deals [postponed] in January and February, and over time other deals were pushed – and of course the war in Ukraine didn’t help at all. Issuers have either canceled their trades or pushed back the trade schedule further in hopes of better market conditions, and this will obviously have an impact on issue volume.
Padma Rajagopal, also vice president and chief credit officer at Moody’s, said the slowdown in the PLS market was unpredictable. She noted that this is a by-product of external factors such as rapidly rising inflation and interest rates, and a brutal war in Ukraine which is exacerbating inflation due to its impact on supply chains.
“I think the driver of that – decisions to cancel or move certain shows to another time – is largely driven by volatility relative to [interest rate] spreads, which happens in the market for many reasons, including war [in Ukraine], and also because of rate movements,” Rajagopal said. “But there was still [PLS] deals that were closed after a break, because maybe they [the issuers] found an investor to buy it, and it just took them longer.
Franco added that the current rising rate environment is probably having the biggest impact on smaller players hoping to enter the PLS market.
“We expect market volatility to shake up some of the less capitalized origination entities that may have been interested in issuing PLS,” he said. “…They don’t have the balance sheet to hold longer term assets if the securitization window isn’t open when they need it.”
Franco said this would likely cause some smaller issuers to become less active in the PLS market.
“Expected [PLS] volumes were generally expected in the $200 billion range [in 2022] from first, non-QM, reproducing/non-performing [securitizations]; CRT [credit-risk transfer transactions]; single family rental [deals]; agency investor lending and other areas,” Franco said. “Some of those projections have come down a bit over the course of March. [However,] many players still expect global securitization volumes in the non-agency space to be over $175 billion for 2022.”
However, when rates in the housing market will stabilize is an unknown at this point. Weng said the market has clearly shifted into a buying cycle, with both rate and term refinancing declining in the face of rising rates. This, in turn, has led to an overall decline in mortgage lending, which is the collateral fuel that drives the PLS market.
Non-QM Player Angel Oak Mortgage Solutions was criticized by brokers when it announced last week that it would break the locks and force borrowers to relock current rates, instituting a new 30-day rate lock policy. The company said it was forced to make quick adjustments to ensure liquidity in a highly volatile market.
“The sharp rise in the 2-year swap rate along with the rapid increase in securitization market credit spreads has led to an unusually rapid rise in non-QM rates that the industry has never seen before,” said an Angel Oak spokesperson.
The 30-year fixed mortgage rate rose for the fourth straight week to 4.90% [as of the first week of April] and is now more than 1.5 percentage points higher than a year ago,” said Joel Kan, associate vice president of economic and industry forecasts for the Mortgage Bankers Association. “As higher rates reduce the incentive to refinance, [mortgage] the volume of applications fell to its lowest level since the spring of 2019. The refinancing share of all applications fell to 38.8%, from 51% a year ago.
Freddie MacChief Economist Sam Khater points out that rates have actually “increased by 1.5 percentage points in the last three months alone”, which has increased the monthly payment for those looking to buy a home. 20% compared to a year ago and therefore “slowed purchasing activity.”
Weng said if inflation remains unchecked, rates could potentially rise even further. “So that’s why it’s hard to say where that stability is” at this point, he added.
“Mortgage rates have risen after being very low for an extended period, so prime refi activity will naturally slow unless something drives rates back down,” said Roelof Slump, managing director of US RMBS at fitch reviews. “However, that seems unlikely given where we are in the rate cycle and the inflation backdrop.”
Yet, rates must not fall for the PLS market to thrive. They just need to stay put for a while.
“Once this volatility settles, rates could moderate somewhat, and stabilization could also spur more activity,” Slump added.
For example, he said, “there may still be an opportunity for some borrowers to credit and refinance conforming or prime mortgage products at lower coupons than they are today. “.
And while the non-QM market, which serves non-agency borrowers, such as the self-employed, also faces challenges in a rising rate environment, Slump said “non-QM needs are not expected to vanish”.
Franco echoed that sentiment, saying extended credit products — such as non-QM loans — are likely to “increase as a percentage of total mortgages in the future.”
Since the beginning of April, a total of 29 non-QM securitizations have been completed or are in progress worth $12 billion, compared to 17 transactions valued at $4.8 billion in the first three months of 2021, the PLS data compiled by Kroll bond rating agency (KBRA).
Eight other non-QM securitization deals were also active in the first three months of this year, but were not among the deals tracked by KBRA – although they were rated by other agencies, such as Fitch Ratings. If these eight non-QM private label deals are added to the mix, the total number of deals over the period rises to 37, worth $15.2 billion.
“House prices are going up and rates are going up, so people will be spending a higher percentage of their income on housing, which means more loans will flow into non-agency credit programs,” Franco said. .
Rajagopal added that one sector that seems less affected by the current volatile rate environment is the single-family rental market, “where we are seeing more and more new issuers taking an interest in the space.”
In fact, from the beginning of the year to April 12 of this year, according to transaction data tracked by KBRA, there have been a total of 62 prime and non-prime RMBS transactions backed by pools of loans valued in total at nearly $32 billion. Investment property-backed RMBS deals accounted for 18 of those deals valued at $8.4 billion, or a 26% share.
In addition, during the same period, a total of seven single-family rental (SFR) deals worth nearly $5 billion were in the PLS pipeline – for a total of 25 investment real estate transactions in the two sectors, backed by loan pools of a total value. at $13.4 billion.
In a single-family rental, or SFR, transaction, a single borrower, such as a corporation with an interest in thousands of rental properties, issues securities backed by a single loan, which is itself secured by a pool of rental mortgages. The typical private label RMBS transaction, on the other hand, involves issuing tranches of securities that are directly backed by a large pool of residential mortgages.
“PLS is now a diverse market and mortgage financing needs continue in many areas,” Franco said.