Credit performance of residential mortgage-backed securities (RMBS) backed by nonqualified mortgage loans remained strong in Q1 2019, according to the latest report from Morningstar Credit Ratings. According to Morningstar’s research, while high prepayment levels may typically indicate poor loan quality, the trend of recent relatively high prepayments hasn’t impacted credit quality. The report states that prepaid loans and the remaining loans have a similar credit quality, noting that many deals have seen prepayment rates above 20%.
Non-QM RMBS issuance also climbed in the first quarter, as several first-time issuers launched transactions. Morningstar rated seven new transactions that quarter, which brought the total number of non-QM RMBS deals we rated through the end of March 2019 to 23. The weighted average Morningstar loan-to-value ratio, or LTV, was 68.5% and the weighted average FICO score was 693, though the average loan size of $395,662 is below that of most other deals, while the weighted average coupon rate of 7.1% was the highest amongst the deals Morningstar rated.
“As noted in our RMBS outlook for 2019, we expect non-QM RMBS issuance to continue to increase in 2019, with the credit quality of the collateral weakening somewhat but remaining overall consistent with the prior year,” said Morningstar in a release. “Also, we expect the non-QM RMBS transaction structures to evolve as issuers explore ways to optimize funding costs and maximize proceeds from securitization.”
Government-back loans as a whole have seen a resurgence. Kroll Bond Ratings Agency reported 63 percent increase in residential mortgage-backed securities (RMBS) issued in 2018 over 2017. The report indicated that if the U.S. GDP was to grow at the steady pace it has this year, until July 2019, the year could see "another robust issuance year in 2019." However, factors such as higher interest rates, home price moderation, and widening spreads that have been experienced by the market in the last few weeks are likely headwinds that might pull down the performance of RMBS next year, the report revealed.
"Given the potential downside risks, we aren’t forecasting issuance growth in 2019, but believe issuance will be comparable to 2018 levels," KBRA stated in the outlook.