Residential mortgage-backed securities (RMBS) remain a bleak market for 2023. A high inflation rate, elevated rates, and the possibility of a recession will cause RMBS issuance volumes to further decline from 2022.
According to a report from DBRS Morningstar on the outlook of the RMBS market, origination volume will decline dramatically and mortgage lenders will leave the business.
According to the report, recently, many lenders have left the business and others, especially in the nonbank financial sector, have significantly reduced downsized operations. It is noted, however, that challenges will arise from capital availability and industry capacity, especially for unconventional sectors.
Lenders’ origination volume plummeted in 2022 due to the Federal Reserve’s monetary policy to curb inflation. Consequently, collateral available to support secondary market securitizations in both agency and non-agency markets decreased.
MBS perform best in an environment of stable interest rates, and inflation reduces investor demand for mortgage-backed securities. Consequently, lenders increase interest rates as mortgage-backed securities prices fall due to decreases in demand.
In 2023, RMBS transactions across the prime, non-prime, and credit-risk transfer (CRT) segments will decrease by approximately 40% to $61 billion due to declining home prices, high inflation, and potential volatility due to changing economic conditions and geopolitics. According to a Kroll Bond Rating Agency report, the total is down from $102 billion expected in 2022.
With the recent change in loan ceiling limits, DBRS noted that higher conforming loan limits for government-sponsored enterprises (GSEs) would curb non-agency shares and securitized production.
Credit performance of RMBS will be largely determined by economic conditions in the coming years.
Credit performance improved throughout 2022, but has effectively bottomed out with delinquencies and losses. With the current economic climate, DBRS says there is a higher likelihood of moving away from historically low levels.
