If the expression "time heals all wounds" holds true in the fixed income markets today, investors may finally be ready for an important shift in the composition of Residential Mortgage-Backed Security (RMBS) issuance. As this week's chart illustrates, RMBS origination remains almost entirely dependent on U.S. Government backing through guarantees from Ginnie Mae, Fannie Mae or Freddie Mac. Sizable litigation costs associated with pre-crisis mortgage lending, compliance with new government regulations, and a cautious investor base for newly originated non-agency RMBS have all contributed to the slow pace of securitization.
While the size of issuance since the financial crisis can be labeled as disappointing, the credit quality of post-crisis deals cannot be. A recent Fitch report highlights the "exceptional" performance of post-crisis jumbo RMBS with only eight borrowers more than 90 days delinquent out of roughly 32,000 loans. This performance is clearly one sign of how tight mortgage lending standards have been since the financial crisis. However, a recent Federal Reserve survey shows banks are making it easier and quicker for borrowers to get a mortgage approved.
Key Takeaway: The record $1.2 trillion non-agency RMBS issued during 2006 will certainly not be broken anytime soon (likely a very good thing). However, a freeing up of credit pipes for residential mortgage lending without government support should help sustain the moderate growth levels for both the U.S. housing market and economy as a whole.
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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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