Residential Mortgages and RMBS: 60-Second Market Review and Insights

Originations and Issuances, by the Numbers

New mortgage originations reached $428 billion in Q1 2018, down from $491 billion in Q1 2017 (a 12.9% decrease), according to data from the Federal Reserve Bank of New York. However, housing debt climbed to $8.94 trillion in Q1 2018, up from $8.63 trillion versus a year ago (an increase of 3.6%). Housing debt remains the leading source of consumer debt in the United States at 68% of the $13.21 trillion in national household debt. As such, it can be a bellwether for consumers’ financial health and the direction of the economy.

Although subprime originations in other areas, including auto loans, personal loans and credit cards, have declined, mortgage loans are bucking the trend. In Q1 2018, 8.39% of mortgage originations were to borrowers with credit scores below 660, up from 8.24% in Q1 2017. Despite this increase, however, originations are still very low when compared with the pre-financial crisis high of 25.61% in Q1 2007.

After doubling in 2017 over 2016 levels, securitization issuances will likely rise further in 2018. In fact, S&P believes issuances will climb to between $80 and $100 billion.

Performance and Practices

Mortgage delinquencies have continued their downward trend. In Q1 2018, 1.22% of mortgage balances were 90+ days delinquent, versus 1.67% a year ago – lower than delinquencies for auto loans, student loans and credit cards, and well below peak levels of 8.89% in Q1 2010.

All signs point to the potential for a robust subprime RMBS comeback, albeit under the guise of “non-prime.” Following years of increasingly cautious lending after the financial crisis, certain lenders are relaxing their standards to some extent and thus, increasing their risk exposure. For example, Carrington is now extending loans to borrowers with FICO scores as low as 500. The trend of loosening standards has spread to the prime RMBS sector, with sparse supporting documentation loans becoming more prevalent, according to Fitch, and evidenced by Fannie Mae increasing its maximum allowable debt-to-income (DTI) ratio for mortgages to 50%, up from 45%.

Looking Ahead

High demand is putting upward pressure on property prices, but at the same time, sales have dropped due to low supply. Interest rate hikes coupled with the new tax law – which has lowered the threshold for interest deductions on mortgage debt – could make mortgage payments less affordable for some borrowers. This in turn could further reduce home sales.

Many have put the collapse of the housing market behind them, but RMBS litigation is still rumbling on, with cases either on the path towards trial or settling. Among the most recent developments include RBS’s $4.9 billion settlement with the Department of Justice to resolve its inquiry into the bank’s RMBS issuance and underwriting practices, and the U.S. Supreme Court’s decision to uphold an order requiring RBS and Nomura to pay $839 million over allegedly misrepresenting the quality of mortgages it sold to Fannie Mae and Freddie Mac. As we noted in a prior post, although the statute of limitations has expired on new repurchase or fraud claims, disputes among participants over indemnity are on the horizon.

From an investor perspective, we are seeing a renewed demand for subprime RMBS, due to restored confidence in the market following years of stringent underwriting and subsequent strong deal performance. However, risks are creeping back in. Today’s risks come in the way of rising interest rates, tariffs and a potential trade war, which could have a significant impact on job losses. For now, originations and delinquencies remain well below peak levels, and although any systemic failure would likely be years away given the stringency of bank requirements in response to the financial crisis, the future for the RMBS market depends on how well these risks are managed this time around.


Massimo Giugliano, counsel in the Insolvency, Creditors’ Rights & Financial Products Practice Group of Davis & Gilbert, contributed to this post.

All tags: Excluded tags = [podcast, press-mention, publication, report, webinar]
tagList = [mortgage-loans-cmbs-and-rmbs]
tagList_filtered = [mortgage-loans-cmbs-and-rmbs]