MReport March 2019

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TH E M R EP O RT | 63 SECONDARY MARKET THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T Trends in GSE Credit Risk Transfers Fitch Ratings details projections for future credit events and losses for the first half of 2019. I n its latest "GSE CRT Loss Projection" report, Fitch Ratings revealed that their reference pool loss projec- tions have lowered on every transaction compared to their prior review in July 2018. At the "BBBsf' rating stress level, projected losses were revised downward by an average of 15 basis points (bps) as a percentage of the remaining mortgage loan pool balance. The declining projected losses reflect strong collateral performance, increased home price appreciation, and a shorter remaining period until transaction maturity," the report stated. The GSE CRT Loss Projection report is published every six months in January and June detailing the projections for future credit events and losses on mortgage loan pools refer- enced by GSE credit risk transfer transactions. The report points out to an increase in overall as well as early delinquency trends among recent transactions—a higher trajectory compared to prior vintages. It indicated the trend remains better than initial expectations even for recently issued transactions. According to the report, the average 60-plus day delin- quency percentage for 60 percent to 80 percent loan-to- value (LTV) reference pools is 25bps among transactions with at least 12 months seasoning. No pool was higher than 56bps in this category, it said. For 81 percent to 97 percent LTV reference pools, the average is 44bps, with no pool higher than 90bps. Fitch also highlights a 2 percent average increase in prices since the last review in July. "The resulting lower mark- to-market LTV ratios of the reference pools have driven current loss expectations lower relative to deal closing," the report adds. According to the report, voluntary mortgage insurance (MI) cancellations were higher than expected. "For borrow- ers who are eligible to cancel but have not yet done so," the report reads, "Fitch increased the haircut to the MI benefit to reflect the possibility that they could cancel sooner than the model currently expects." The report also indicated that all GSE CRT transactions reviewed have a hard bullet maturity date of 10 years or 12.5 years from issuance, depending on the transaction. The RMBS Outlook How is private-label residential mortgage-backed securities issuance likely to perform in 2019? T he issuance of pri- vate-label residential mortgage-backed securi- ties (RMBS) is expected to grow at the same pace as last year, according to Morningstar's RMBS outlook. The ratings agency said that while it doesn't expect rising interest rates to impact RMBS issuance, higher rates might make securitiza- tion an economically attractive alternative to selling or retaining mortgage loans for originators. The ratings agency expects the variety of mortgage types backing new RMBS to continue to expand as borrowers look for more afford- able loans owing to potentially higher mortgage rates and "is- suers seek to improve funding costs for various mortgage types or to diversify funding sources." Even though it will remain historically strong, the collateral credit quality of RMBS is projected to some- what weaken in 2019. The outlook also projected the growth in issuance of transactions backed by mortgage insurance (MI) due to the growing number of insurers embracing securitiza- tion and the potential steady demand for MI "as borrowers seek to lower down payments." Morningstar also expects the issuance of RMBS backed by non-qualified mortgage (non-QM) loans to continue to increase as the number of borrowers with other types of debt such as student loans, seeking homeownership or more affordable mortgage loans increases. "Also, the likely slower home purchase and rate refinanc- ing activity would allow mortgage brokers and loan officers to focus more on originating non-QM loans, which typically require more time and effort than GSE- guaranteed loans and prime jumbo loans," the outlook indicated. It expects modest growth in the issuance of credit risk transactions backed by GSE-guaranteed loans even as the collateral composition of CRTs is likely to shift due to the growth in the share of equity cash-out loans among GSE guaran- teed mortgage origination. One potential headwind that could adversely affect RMBS performance, according to the out- look, is the decline of home prices because of rising interest rates or a weaker economy. Additionally, borrowers in states with steep home prices and high local and property taxes might pay more in federal income taxes as a result of the Tax Cuts and Jobs Act, "and this could weigh on their capacity to repay mortgage loans." However, Morningstar said, strong mortgage underwriting, available credit en- hancement, servicer loss mitigation, and other factors would help offset the potential negative impact of these challenges on bondholders. One potential headwind that could adversely affect RMBS performance, according to the outlook, is the decline of home prices because of rising interest rates or a weaker economy.

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