Non-prime residential mortgage-backed securities transactions are making a comeback of sorts and are projected to grow more rapidly in the long term, according to a new report from Fitch Ratings titled “The Return of Non-Prime U.S. RMBS.”
According to Fitch, in the last 18 months there have been 10 non-prime RMBS transactions worth more than $1 billion each from five issuers—and Fitch projects the number of non-prime RMBS issued to double over the next year.
“Growth in US Non-Prime RMBS is expected as an increase in interest rates will redirect some lender focus from prime refinances to non-prime, and successful securitizations provide visibility and incentives for potential issuers,” said Managing Director Grant Bailey. “But legislative, regulatory and market changes will limit non-prime RMBS to a very small share of the total U.S. mortgage market.”
Fitch noted that the non-prime RMBS transactions has come with some key improvements over the one from a decade ago that precipitated the financial crisis. Perhaps the most noteworthy changes since then are the Ability -to-Pay rule and risk retention, thus mitigating a number of pre-crisis risks—for instance, the changes held lenders more accountable for making bad loans. Other key changes include increased third-party due diligence and fraud risk controls.
Despite the projected growth of non-prime RMBS, Fitch said a repeat of the 2008 crisis is not in the cards. The company noted that in the years immediately prior to the crisis (from 2005 to 2007), approximately $60 billion in Alt-A and subprime RMBS were issued per month (totaling approximately $2 trillion).
“Even assuming rapid growth, volume in 2017 will remain less than 1 percent of peak-vintage volume,” Fitch stated in the report. “Legislative, regulatory and market changes will limit non-prime RMBS to a very small share of the total U.S. mortgage market.”
According to Fitch, however, the uncertainty over borrowers’ credit behavior remains a chief concern.
“Early non-prime RMBS performance has been very good, though borrowers in these programs are expected to default at higher rates and will be more vulnerable to economic stress than prime borrowers,” Bailey said. “What’s more, limited performance history for borrowers with recent major credit events plus the lack of precedent on how courts will interpret the ATR rule adds uncertainty to projections.”
Click here to view the complete report from Fitch.