Another post-financial crisis record for mortgage-backed private label bonds is expected in 2022, with emissions expected to increase 15% from that year, according to a report by the Kroll Bond Rating Agency. However, the investment banks' ability to handle the capacity could have an impact on the market.
The largest segment of PLS deals – Prime – will, at best, remain unchanged year-on-year after the Federal Housing Finance Administration's suspension of the purchase caps. This segment could also be affected by the expected increase in compliant credit limits by the FHFA. Some lenders have already raised their own limits in anticipation.
KBRA projected $ 132 billion in PLS issuance in 2022, including $ 78 billion in prime, $ 34 billion in nonprime and $ 21 billion in government-sponsored corporate credit risk transfer operations.
The rating agency increased its expectations for 2021 by nearly $ 20 billion to $ 115 billion, more than double the pandemic-hit 2020. That includes $ 78 billion in year-to-date emissions driven by transactions $ 38 billion projected in the fourth quarter will be supported, a new post-crisis record for a quarter.
But the problems affecting the US economy – particularly labor shortages, supply chain problems, and inflation – could counteract the low interest rate environment that is propping up the home market.
"Aside from investor performance and appetite, which could lead to volatility due to the above economic trends, capacity concerns will be an important factor in sourcing and spending throughout the RMBS supply chain," said Armine Karajyan's KBRA report, Jack Kahan and Eric Thompson, named. "All areas of the PLS ecosystem suffered mounting pain to support the 2021 volume increases."
Nonprime issues are likely to grow 26% yoy as spreads are set to normalize after a steep spike in late 2021. Kroll expects agency CRT transactions to increase 53% due to likely future changes in the GSE, the capital framework for these transactions is expected to be favorable, which also prompted Fannie Mae to return to the CRT issue earlier this year.
Capacity issues affect KBRA's emissions projections. "While all areas were struggling, many pointed out that outside auditing firms were causing delays in RMBS issuance," the report said. "This, in combination with a rapidly increasing volume, has led to certain issuers in the prime sector moving more and more from a 100% duty of care to a statistical sampling approach for checking the credit level."
While statistical sampling is conceptually sound, its effectiveness depends on the rigor of the approach – things like sample size, selection process, and handling of the results all affect the reliability of those results with regard to the loan as a whole. "KBRA continues to monitor current trends in this area."
The “esoteric” subcategories of PLS issuance likely to increase in 2022 include reverse mortgage, mortgage servicing rights-backed issuance, home equity line of credit-backed deals, private label CRT and Ginnie Mae early buyout transactions.