The issuance of residential mortgage-backed securities (RMBS) is likely to end 2018 with an increase of 63 percent over 2017, according to an outlook on RMBS released by Kroll Bond Ratings Agency (KBRA).
The outlook reviewed and presented updates to issuance volume trends and forecasts, spreads, and collateral performance trends. It also recapped some of the highlights of the 2018 RMBS market and the themes that would shape it over the next year.
The report pegged the Q4 RMBS volume in excess of $10 billion, down from a post-crisis high of over $15 billion in the second quarter of the year, "but still well above recent years' volume."
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 said in the outlook.
Breaking up RMBS issuances, KBRA said that while each issuance segment grew year over year, the gains were primarily driven by prime transaction issuance, which grew by $10.7 billion, nearly doubling from 2017. Non-prime issuance also added to the gains and was expected to end the year at just under $10 billion. Credit Risk Transfer (CRT) issuance remained mostly flat at around $15 billion, KBRA reported, showing a 5 percent increase over last year.
Though Prime issuance doubled in size, nearly 75 percent of the increase was attributable to Prime sub-types which had contributed only 20 percent of 2017’s Prime issuance volume. These sub-types include agency-eligible loans (both investor occupancy and noninvestor occupancy) and expanded prime loans.
KBRA projected expanded prime sub-types to have the most upside for issuance volume in 2019. However, the rating agency said that it also expected them to be affected by similar dynamics that have been impacting non-prime issuance.
The outlook also expected non-prime issuance to expand modestly in 2019 due to a number of factors that would increase the origination volume and related issuance volume. "In particular, increased attention to the space as compared with the past few years of relatively high coupon lending and tighter spreads have caused originators to
focus on alternative loan product offerings, process, and technology to increase profitability," KBRA projected. "Positive early performance of Non-Prime loans and a favorable economic environment have also encouraged originators to continue expanding products, increasing loan supply.
Click here to read the detailed outlook on RMBS.