The issuance of private-label residential mortgage-backed securities (RMBS) is expected to grow at the same pace as last year, according to Morningstar's RMBS outlook. The ratings agency said that while it doesn't expect rising interest rates to impact RMBS issuance, higher rates might make securitization an economically attractive alternative to selling or retaining mortgage loans for originators.
The ratings agency expects the variety of mortgage types backing new RMBS to continue to expand as borrowers look for more affordable loans owing to potentially higher mortgage rates and "issuers seek to improve funding costs for various mortgage types or to diversify funding sources." Even though it will remain historically strong, the collateral credit quality of RMBS is projected to somewhat weaken in 2019.
The outlook also projected the growth in issuance of transactions backed by mortgage insurance (MI) due to the growing number of insurers embracing securitization and the potential steady demand for MI "as borrowers seek to lower down payments."
Morningstar also expects the issuance of RMBS backed by non-qualified mortgage (non-QM) loans to continue to increase as the number of borrowers with other types of debt such as student loans, seeking homeownership or more affordable mortgage loans increases. "Also, the likely slower home purchase and rate refinancing activity would allow mortgage brokers and loan officers to focus more on originating non-QM loans, which typically require more time and effort than GSE-guaranteed loans and prime jumbo loans," the outlook indicated.
It expects modest growth in the issuance of credit risk transactions backed by GSE-guaranteed loans even as the collateral composition of CRTs is likely to shift due to the growth in the share of equity cash-out loans among GSE guaranteed mortgage origination.
One potential headwind that could adversely affect RMBS performance, according to the outlook, is the decline of home prices because of rising interest rates or a weaker economy. Additionally, borrowers in states with steep home prices and high local and property taxes might pay more in federal income taxes as a result of the Tax Cuts and Jobs Act, "and this could weigh on their capacity to repay mortgage loans." However, Morningstar said, strong mortgage underwriting, available credit enhancement, servicer loss mitigation, and other factors would help offset the potential negative impact of these challenges on bondholders.
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