Morningstar: With Private-Label RMBS Stymied, Nontraditional Deals Take Charge

Morningstar Credit Ratings LLC, New York, said as securitization of jumbo residential mortgages remains in the doldrums, nonmainstream deals are coming to market.

The report, by Morningstar Managing Director Brian Grow and Senior Vice President Gaurav Singhania, said rebounding home prices and, in the instance of reperforming and nonperforming transactions, repaired borrower credit, have reduced credit risk in these transactions. In an otherwise moribund market, Morningstar expects interest among originators to securitize single-property investor loans.

The Securities Industry and Financial Markets Association reported non-agency issuance of residential mortgage-backed securities totaled $26.6 billion through June, down 41.3 percent from the same period last year. Seasoned deals, which generally include nonperforming and re-performing assets, totaled $8.1 billion through June, up more than eightfold from the same period last year.

“Issuers have adopted accretion-directed structures and other mechanics to increase their advance rates on the senior class,” the report said. “Over the past few months, issuers began underwriting so-called single-borrower, single-property, single-family rental loans as business-purpose loans. With this approach, underwriting is focused on verifying property rental income rather than the borrower’s creditworthiness, as is typically the case. It remains to be seen whether this approach will result in better loan terms for the borrowers or higher borrower approval rates.”

Morningstar said it does not expect any meaningful boost this year in private-label RMBS. “Because securitization is not currently an economical funding source, most plain-vanilla mortgages are being held on the originators’ balance sheets or being sold as whole loans,” Grow and Singhania said. “The industry has made progress related to the role of deal agents and representation and warranty reviewers in private-label RMBS securitizations. However, remaining aspects of private-label transactions, including full due diligence, add substantial expenses to RMBS securitizations. Most postcrisis transactions carry out due diligence on every loan, and we do not see that changing for a while because of the recent implementation of the TILA-RESPA Integrated Disclosure rule.”

Meanwhile, Morningstar added, issuers remain reluctant to securitize nonqualified mortgages or mortgages that don’t meet requirements of the Consumer Financial Protection Bureau.