Mortgage securitizations backed by nonprime loans are expected to see a substantial increase this year as lenders move away from prime refinances.
During the past year-and-a-half, there have been 10 nonprime residential mortgage-backed securities issued. Five issuers were responsible for the deals.
But the volume of nonprime issuance is expected to see a two-fold increase this year. In addition, an even bigger increase is expected over the long term.
That is according to The Return of Non-Prime U.S. RMBS (What Investors Need to Know) from Fitch Ratings.
“Growth in U.S. nonprime RMBS is expected as an increase in interest rates will redirect some lender focus from prime refinances to nonprime, and successful securitizations provide visibility and incentives for potential issuers,” Fitch Managing Director Grant Bailey said in a statement. “But legislative, regulatory and market changes will limit nonprime RMBS to a very small share of the total U.S. mortgage market.”
Despite concerns about returning to the pre-crisis subprime market, Fitch noted that today’s nonprime market has improved substantially. This includes the Ability-to-Repay rule and risk retention.
Bailey noted that early nonprime RMBS performance has been very good, though prime mortgages will continue to outperform nonprime loans.
But Bailey warned that there is a
lack of precedent on how courts will interpret the ATR rule. He also said there is limited performance history for borrowers with recent major credit events.
“A ‘AAA’ rating will not be initially attainable for some issuers due to a limited track record, a point of view Fitch has had in place for several years across numerous other securitized asset types” the ratings agency stated. “Specifically, multi-originator conduit programs that were developed recently and consist of originators that Fitch is not familiar with will face hurdles to achieving ‘AAA’ ratings until a greater track record is established and Fitch has developed greater knowledge of the underlying originators.”
