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Jumbo, Reverse and Nonprime RMBS Issuance to Rise

Issuance of residential mortgage-backed securities filled with jumbo mortgages, nonprime loans and reverse mortgages is forecasted to rise next year, while credit standards are likely to ease.

The RMBS market is expected to continue to expand during 2018. Issuance will be robust across deal types as performance remains steady thanks to a strong housing market and macroeconomic fundamentals.

As was the case this year, next year’s issuance is expected to include deals securitized by new issuers that are backed by a wider array of assets — possible with diverse structural elements.

Moody’s Investors Service provided the prediction Wednesday in
2018 Outlook – Credit will expand but performance will remain strong.

Lenders are expected to gradually ease credit standards on jumbo loans as expanded prime transactions gain traction.

“Although prime jumbo deals will include more loans with lower FICOs, nonstandard loan terms, and higher LTVs than 2017 transactions, overall origination quality will remain largely strong, as underwriting standards are still generally tight and regulatory requirements, such as the Consumer Financial Protection Bureau’s Ability-to-Repay rules, discourage originators from making risky loans,” the report stated.

Moody’s noted that some lenders will reduce their due diligence sample sizes to less than 100 percent as some issuers begin to rely on sampling to conduct third-party due diligence. This could
introduce risk depending on the how robust the sampling methodology and quality-control procedures are.

Jumbo issuance volume is projected to rise, and some new issuers are expected to enter the market.

“Non-agency prime jumbo RMBS volume will continue to increase in 2018, with some issuers, like Redwood Trust Inc. and Galton Funding, issuing more transactions backed by weaker prime collateral, and also new issuers, like American International Group, entering the market,” Moody’s stated.

The report indicated that nonprime RMBS collateral quality
will be on par with pre-2010 vintage Alt-A loans — though underwriting will be better.

In addition, deals will be structurally weaker than today’s prime deals. This includes weak representation-and-warranty provisions.

“Issuance will rise as a result of increased investor acceptance of the asset class,” Moody’s said on nonprime transactions.

The ratings agency projects that the securitization of proprietary reverse mortgages, private-label reverse mortgages and home-equity conversion mortgages will also rise.

“Furthermore, recent changes to the HECM program reducing allowable loan amounts for HECMs with interest rates between 3.25 percent and 5.0 percent will likely push less efficient HECM originators towards originating private-label reverse mortgages, as they will not be able to compete with more efficient originators at lower interest rates,” Moody’s said.

But Moody’s warned that the small number of reverse mortgage servicers leaves the market vulnerable to disruption if one goes out of business.

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