Last week, I discussed an up beat S&P report on the overall RMBS market. Today I discuss and S&P report on the jumbo mortgage market. This report sees much slower growth in the private-label jumbo residential mortgage-backed securities market. It opens,
U.S. housing has been recovering, and residential mortgage collateral performance continues to improve, a trend that we expect to continue in 2015. However, housing finance still faces challenges and relies on government support. Private capital has been slow to reenter the residential mortgage market, and nonagency securitization volume remains relatively small, with diversity and growth mostly coming from nontraditional transactions in recent years. Standard & Poor’s Ratings Services believes nonagency securitization—-utilizing private capital–could be a key contributor to a more healthy housing finance market while limiting risk to taxpayers.
A revival in the U.S. nonagency residential mortgage-backed securities (RMBS) market has not followed measured recoveries in the broader economy, employment, and housing. RMBS not guaranteed by one of the government-sponsored enterprises (GSEs)–such as Fannie Mae or Freddie Mac–hit a high of $1.2 trillion in 2006, but we expect that figure to be near $50 billion in 2015, up approximately $12 billion from 2014. Clearly, even with the ongoing recoveries in the overall economy and housing market, nonagency U.S. RMBS-related issuance remains negligible in the $10 trillion housing finance market.
We believe the slow pace of non-agency securitization reflects a market still grappling with the changing economics of complying with new regulations, a lack of standardization in nonagency securitization provisions, anticipated interest rate hikes in mid-2015, and a cautious investor base in newly originated nonagency RMBS. Considerable clarity has emerged regarding new regulations this year, but other limiting factors persist.
Hopefully, S&P has correct identified the cause of the slow growth in this sector. But we need to be vigilant to ensure that there is not a more fundamental problem with the jumbo private-label MBS market. it is vital that this sector of the market develops in order to provide a private capital alternative to the existing market which depends to a very large extent on government guarantees.
