First quarter issuance doubled 2016’s total
Back in February, DBRS predicted that the residential mortgage-backed security market could see a resurgence in 2017 thanks to rising interest rates, which both drive down refinances and make securitization a more financially appealing option.
As it turns out, that’s exactly what’s happening.
A new report from Standard & Poor’s Global Ratings shows that RMBS-related issuance, which S&P defines as prime, re-performing/nonperforming, rental bonds, servicer advances, and risk-sharing deals, doubled in the first quarter of 2017 compared to last year.
According to S&P’s report, there was $14 billion in RMBS-related issuance in 2017’s first quarter, up from $7 billion in the same time period in 2016.
As a result of the strong first quarter, S&P said that it is increasing its 2017 forecast for RMBS issuance from $35 billion to $50 billion.
It should be noted that even if 2017’s total RMBS issuance reaches $50 billion, it would still be below 2015’s total of $54 billion. But $50 billion would top 2016’s total of $34 billion and 2014’s total of $38 billion.
According to the S&P report, 2017’s first quarter issuance consisted of $5 billion in credit risk-sharing deals from Fannie Mae and Freddie Mac and $4 billion of re-performing/non-performing loans.
S&P noted that the rise in jumbo issuance and non-conforming issuance is “positive for markets as issuers are now supplying enough issuance to support the development of a secondary market.”
And if that continues, a “broader scope of mainstream fixed-income investors” should be attracted to the market, S&P adds.
“Given this RMBS issuance surge, we are adjusting our 2017 forecast up to $50 billion and will have to continue monitoring the various components,” S&P states in the report. “The $5 billion of (risk-sharing) issuance suggests it reaching an issuance pace that has allowed it to be an ongoing investment program for many market participants.”
S&P’s report also compared securitization volume for consumer loans (auto loans, credit cards, commercial loans) and residential mortgages over the last 15 years.
The report shows that all four loan categories have grown substantially since 2001, but the volume of securitization in each category is down.
“Compared to 2007 leverage levels, residential mortgages today are $1 trillion less, whereas the other three loan products have substantially more leverage,” S&P notes in its report.
“Looking at the share of those that are securitized, all markets have seen lower utilization of securitization, with auto loans at 17.5% securitized, credit cards at 13%, CMBS at 17%, and non-agency RMBS at only 8%,” the report continues. “For the various products, these utilization rates are significantly lower than rates used in 2001, 2004, or 2007.”
The report states auto, credit card, and residential loans each saw an increase in the first quarter, which could be the start of some institutions increasing their securitization utilization. On the other hand, it may reflect the issuers taking advantage of “near-ideal issuance conditions and demand,” the report states.