Fitch: More Big Banks May Return to U.S. RMBS

Largely absent for the past decade, some big banks could be staging a return to the private-label U.S. residential mortgage-backed securities market in the second half of this year, said Fitch Ratings, New York.

In its latest Virtual Investor video series for U.S. structured finance, Fitch Managing Director and U.S. RMBS Group Head Grant Bailey said appetite for private-label RMBS has been muted for the last several years, but a changing broader economy could lead big banks back to issuing new prime jumbo RMBS again for the first time in 10 years.

“Banks are looking to expand their financing options and securitization allows them to do that,” Bailey said. “With spreads tightening and the yield curve flattening, the economics of securitization have improved and are now more attractive.”

Meanwhile, Fitch said interest in “off the run” RMBS asset types remains strong with re-performing loan issuance trending at $15 billion annually over the past few years. The difference in recent months, however, is more rated RPL RMBS deals including borrowers with more recent performance problems than pools issued in prior years.

Elsewhere, Fitch said non-prime RMBS issuance continues to grow, albeit from a small base with $3 billion in new issuance likely for 2017. While credit quality on non-prime RMBS still far exceeds that of deals from a decade ago, Bailey said a lack of performance history from some of the newer originators is keeping Fitch on the sidelines in rating some non-prime deals.

“Buoying the RMBS outlook is a solid U.S. housing market,” Bailey said. “With home prices increasing nationally by roughly 5% annually over the last couple of years, U.S. housing appears well positioned to absorb a rise in interest rates. Home price recovery coupled with far fewer foreclosed homes has led to thousands of rating upgrades on pre-crisis RMBS, particularly in the subprime sector.”

That said, Bailey noted housing is not without its hot spots, namely cities such as Portland, Seattle, Las Vegas and Phoenix. “Home price growth in each of these cities is showing signs of being unsustainable as the respective economies are not growing at the same clip,” he said.

The full U.S. RMBS ‘Virtual Investor’ video interview is available on the ‘Video’ page at www.fitchratings.com.