By the Numbers
An eye on new supply in RMBS
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The market in private RMBS has had to soak up a lot of supply lately. Caps on delivery of investor and second property loans to Fannie Mae and Freddie Mac have pushed some into private securitizations. Heavy origination of prime jumbo loans has created another steady flow of new deals. Widening spreads suggests the market has struggled to keep up. While the visible new supply of investors loans has abated, loans awaiting securitization may still be sitting on dealer balance sheets. The heavy supply of jumbo loans looks more reliable, although a bottleneck in loan review capacity could slow securitization.
Drivers of supply in agency eligible investor collateral
Freddie Mac recently announced that starting in July it will limit monthly deliveries of non-owner-occupied loans to 6.5% of total production and will lower the cap to 6.0% thereafter. The agency ultimately is managing to the 7.0% cap on total deliveries of non-owner-occupied loans over a 52-week lookback period as required by the Preferred Stock Purchase Agreements amended in January by the Treasury Department and the enterprises’ regulator, FHFA. With total non-owner-occupied deliveries to Freddie Mac totaling just over 7.5% of volume in the first quarter, the lower caps should help the agency hit its target.
Fannie Mae may be selectively enforcing caps on monthly deliveries as low as 3.0% for some originators, according to Inside Mortgage Finance. Fannie Mae likely needs to take more meaningful action than Freddie Mac in order to hit PSPA targets. Over the past 12 months, deliveries to Fannie Mae have averaged 8.4% while deliveries to Freddie Mac have been roughly in-line with the 7.0% cap. Increased deliveries of investor loans to Fannie Mae are largely attributable to the agency allowing lenders to underwrite using a PIW waiver while Freddie Mac does not. Fannie Mae may already be enforcing lower caps as deliveries have dipped from 9.7% in March to 5.3% of total production this month. (Exhibit 1)
Exhibit 1: Deliveries of non-owner-occupied loans to Fannie Mae dip in June
Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont
After originators auctioned off a large initial wave of non-owner-occupied loans through bulk sales to broker dealers and mortgage conduits, the supply of those loans has abated to some extent as originators appear to have stemmed production through repricing or through forward sales of production. However, dealers are likely still holding large swaths of these loans on their balance sheets, a source of contingent supply that has yet to be securitized and dealt.
Drivers of supply in prime jumbo collateral
Domestic banks have seen extraordinary deposit growth during pandemic, creating demand for assets to pair against larger liabilities. Deposit liabilities have increased by over $1.5 trillion over the past year across US banks. Despite this, bank holdings of residential mortgage loans have fallen by roughly $50 billion year-to-date and approximately $100 billion over the past year (Exhibit 2).
Negative net demand for mortgage loans may be a function of a number of factors. An overall drawdown in credit availability during the peak of the pandemic likely tightened the credit box for the overwhelming majority of US balance sheet lenders. And the drawdown in credit coupled with fast prepayment speeds likely left banks unable to replace existing portfolio balances. Secondly, if banks assign a relatively short duration to recently added deposits, they may be reluctant to pair longer duration, negatively convex and relatively illiquid assets against those deposit liabilities. While the former constraint likely has abated for the most part, the latter may be the more binding one and may continue to be a headwind to bank demand for either jumbo or investor loans.
Exhibit 2: Mortgage loans fall while deposits rise at US depositories
Source: Federal Reserve H.8, Amherst Pierpont
After a year where the basis between conforming and non-conforming rates decoupled by nearly a point, it has normalized to a spread of roughly 10 bp based on Bankrate average nationally posted jumbo mortgage rates. And the normalization of the spread should drive growing amounts of jumbo originations, especially against the backdrop of pent-up demand as a result of limited credit availability much of last year. Jumbo originations totaled $120 billion in the first quarter, slightly more than the recent peak in volumes observed in the third quarter of 2019. While loan origination volumes are comparable to the latter half of 2019, the amount of those loans headed to private label deals appears to be on the rise as securitization rates in the first quarter of this year were elevated relative to historical percentages and may continue to rise especially against the backdrop of relatively weak bank demand for loans (Exhibit 3).
Exhibit 3: A snapshot of jumbo originations and securitization volumes
Source: Inside Mortgage Finance, Amherst Pierpont
While supply appears poised to continue increasing, there are likely a few factors that may stem it to some extent. First as it pertains to the supply of jumbo relative to investor, if historical precedent holds, banks, on the margin, will likely continue to add jumbo over investor loans despite the better convexity profile of investor paper as jumbo borrowers afford banks more cross-selling opportunities into other assets such as consumer loans.
Secondly, increased securitization rates in the near term will likely be driven by the direction of ‘AAA’ spreads which have come under pressure as a result of the supply technical but have recently found steady clearing levels in the context of roughly two points back of a UMBS 2.5% benchmark. Finally, the amount of supply that can hit the market at a given time will likely be governed, at least to some extent, by the available capacity to perform loan diligence on pools of collateral, capacity which appears to be currently constrained.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
