Next year will see a slow return for non-agency residential mortgage-backed securities, while underwriting standards will be relaxed. Borrowers on loans not designated as Qualified Mortgages will pay more than QM borrowers.
New issuance in the private-label RMBS market will slowly restart in 2014, according to a ratings agency report.
At the same time, next year’s new RMBS transactions will include loans that are of lower credit quality.
The projection was made by Moody’s Investors Service in the report, 2014 Outlook – US RMBS and Servicer Quality.
The New York-based company explained that originators will struggle to maintain conduit loan volume in the face of declining refinance activity –leading them to relax underwriting standards and hurting the credit quality of securitized loans.
Clouding potential RMBS quality is the flux state of representations and warranty protections as issuers continue to explore varying frameworks.
“Institutional investors and RMBS issuers have not yet reached a consensus on the appropriate balance of liability and protection,” Moody’s Senior Vice President and Manager Kruti Muni said in the report. “Investors will have to decide which R&W framework will provide a level of credit protection they deem acceptable.”
Moody’s noted that the creation of a QM class will make it more expensive to originate non-QM loans, because of the risk of borrower legal challenges and penalties that will be borne by RMBS trusts.
Muni said lenders will charge non-QM borrowers more than QM borrowers.
At the same time, Moody’s said that the collateral strength of outstanding RMBS will be stronger since the remaining borrowers in the pools will have stronger credit profiles and the loans will have better performance.
“Improving loan-to-values indicate the credit strength of the remaining borrowers in the pools, and faster liquidation timelines weed out borrowers with weaker credit profiles,” Moody’s Associate Managing Director Debash Chatterjee explained. “Liquidating the backlog of severely aged properties in a portfolio will also lead to a decline in pool losses toward the end of 2014.”
