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Steady 2018 RMBS Market Still Holds Risks

Moody’s Investors Service released its residential mortgage-backed securities (RMBS) 2018 Outlook recently, showing projections for the RMBS market in year to come. The report summarizes how lenders will issue several different types of loans and deals, particularly regarding issuances of new deal types. The report also covers the collateral quality of prime jumbo deals, re-performing/non-performing loans (RPL and NPL), non-prime RMBS, and the credit quality of single-family rental (SFR) transactions.

As performance remains steady amid strong housing and macroeconomic fundamentals, 2018 issuance will include new deals from issuers backed by a wider array of assets. RPLs and NPLs will diversify more as transactions include more types of loans and issuance volume remains high. While the RMBS market will remain stable, it’s worth mentioning that new performance risks will emerge, mainly regarding RPL/NPL transactions. This is due to the variation of servicing practices and collateral composition these loans carry. According to the Moody’s analysis, deals “backed by large percentages of modified loans with looming interest rate step-ups, weak payment histories at issuance, and/or serviced with weaker loss mitigation practices will be at higher risk of an increase in delinquencies.”

SFR transaction credit quality will continue to improve on issuer’s operational efficiencies, but issuance will remain low due to consolidation and emergence of alternative forms of financing. SFR’s strong credit performance will continue thanks to stable vacancy rates and strong rental demand driving rents higher across the country. Prime jumbo deals’ collateral quality, as well as GSE credit risk transfers, will weaken somewhat as lenders intend to ease credit standards.

Regarding servicing, errors should remain low as controls are put in place to address regulatory changes. The changes put forth by the CFPB should drive servicing quality up, however costs for building compliance departments will remain high. Modification levels will continuing decreasing and small- to mid-sized servicers will continue to play a major role in the RMBS marketplace.

You can read more of Moody's 2018 Outlooks by clicking here.

About Author: Dean Terrell

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