By the Numbers
An eye on new supply in RMBS
Chris Helwig | June 18, 2021
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.
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
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
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
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.