Upcoming vintages of non-agency residential mortgage-backed securities will be of worse quality than this year’s issuances, according to a ratings agency report. That same report projects that smaller mortgage servicers will pick up the slack as the biggest servicers downsize.
Collateral behind private-label RMBS issued in 2013 will be riskier than collateral in 2012 securitizations.
Credit quality will be marginally weaker, while a trend of rising weighted-average loan-to-value ratios and declining weighted-average credit scores is expected to continue next year.
Those findings were reported Thursday by Moody’s Investors Service in US Private-Label RMBS and Servicer Quality: 2013 Outlook – Sluggish Recovery in a Changing Environment.
The ratings agency forecasts that pool risks will also increase as a result of increased risk attributes such as non-owner-occupied loans. In fact, Moody’s expects issuers to introduce a new asset class next year that is backed by rental cash flows from single-family properties.
In addition, representations and warranties will be weaker and from smaller, financially less-established originators than those who securitized RMBS this year.
Behind the deterioration is strong investor demand and the evaporation of regulatory uncertainties present in 2012.
“Lender guidelines have not materially loosened recently, but growing investor appetite for prime jumbo RMBS and a limited supply of ‘super-prime’ borrowers has incentivized lenders to originate more loans near the fringes of their underwriting criteria,” Moody’s Managing Director Linda Stesney said in a statement.
Stesney added that a review of small and mid-sized servicers by the Consumer Financial Protection Bureau is a good thing for the industry because smaller and unregulated entities will be held accountable. However, she added that incremental costs will drive additional consolidation
But Moody’s expects performance on outstanding RMBS to stabilize as a result of a strengthening housing market.
Delinquency on legacy RMBS pools in 2012 is expected to decrease in 2013.
Moody’s Associate Managing Director Debash Chatterjee explained in the report that a dwindling level of equity for remaining non-delinquent borrowers and a “tepid” housing recovery will drive a decline in strategic defaults — especially in the jumbo sector.
While loss mitigation timelines are expected to remain lengthy, an increase in short sales will help cut down on liquidation timelines — cutting losses in the process.
Moody’s speculated that as large mortgage servicers strive to meet the performance requirements of the multi-state servicer settlement, short sales and loan modifications will increase.
“Moody’s expects more streamlining by servicers, with larger players strategically downsizing and transferring loans to smaller, nimbler outfits,” the New York-based company stated.
