After a near-death experience, the market for mortgages securitized by private issuers is forecasted to return.
During the run-up to the housing crisis, the issuance of private-label residential mortgage-backed securities peaked at around $1.2 trillion in 2005. By 2008, non-agency issuance had fallen below $0.1 trillion.
But a new report indicates that non-agency issuance is likely to see a resurgence.
The report, Government Agency Loans Lead The U.S. RMBS Market, But A Boost In Non-Agency Origination Is Likely, was authored by Standard & Poor’s Ratings Services.
S&P indicated that steps taken by the Federal Housing Finance Agency — which regulates Fannie Mae and Freddie Mac — will reverse the effects of diminished investor confidence that drove the decline.
FHFA disclosed on Tuesday a strategic plan to reduce the secondary mortgage market’s reliance on government support. Three goals outlined for the next phase of Fannie and Freddie’s conservatorships included the construction of a new secondary market infrastructure and a gradual contraction of the secondary lenders’ domination of the mortgage markets and their operations.
“The GSE and FHA loans have made up most of the market for the past few years, but this isn’t a long-term solution because of the burden of government support on taxpayers,” S&P Credit Analyst Sharif Mahdavian said in the report. “We believe non-agency activity in the prime market will slowly pick up in the future once investors gain confidence in today’s underwriting standards and credit quality.”
The New York-based ratings agency said the private-label RMBS market currently only includes “super prime” loans. But most borrowers are excluded from that market.
In order for non-agency activity to increase, mortgage lenders will need to open up to more average borrowers.
“We think that future securitization can embrace more prime mortgages once investors get more comfortable with today’s underwriting standards,” the report stated.
