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New deal types could help nonagency RMBS issuance shake off sluggish H1

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New deal types could help nonagency RMBS issuance shake off sluggish H1

Aftera sharp year-over-year decline in private-label RMBS issuance during the first halfof 2016, recent commentary offers hints that activity will pick up.

S&PGlobal Ratings put RMBS-related issuance, including prime, re-performing/nonperforming,rental bond, servicer advances, and risk-sharing deals, at only $14 billion forthe first six months of the year, down from approximately $30 billion in the firsthalf of 2015. Sluggish volume led the rating agency to lower its forecast for full-yearissuance to $40 billion from $50 billion.

S&PGlobal Ratings and Market Intelligence are owned by S&P Global Inc.

Risk-sharingtransactions accounted for just over half of the year-to-date issuance, and therating agency expects that the volume of those kinds of transactions will remainstrong through the balance of 2016. But two different kinds of transactions thatclosed earlier in the year provide hope that activity will accelerate in the future.

The firstand most heavily publicized of them was Chase Mortgage Trust 2016-1, a $1.9 billion transactionthat conformed to the FDIC's 2010 securitizationsafe harbor rule. As Fitch Ratings explained as it prepared to rate the transaction,by the bank's compliance with the safe harbor rule's conditions, the FDIC effectivelyconfirms the legal isolation of the underlying assets from the bank in the caseof its insolvency.

Approximately74% of the collateral pool consisted of confirming loans, and all of the underlyingloans had been originated by JPMorganChase Bank NA. Under the safe harbor provisions, the bank retained avertical slice of each class of certificates.

"We'vedone one, and we're looking at more securitizations in the mortgage space,"said JPMorgan Chase & Co.Executive Vice President and CFO Marianne Lake during a July 14 in response to an analyst'squestion about the bank's potential to conduct similar deals in the future.

"We'reretaining … the securities on our balance sheet, and in doing that we've been ableto get private capital to take the majority of the lower credit risk and get bettercapital treatment for ourselves," Lake added.

Chairman,President and CEO Jamie Dimon had previously lauded the deal as "the firstreal securitization in a long time in the mortgage business," and S&P GlobalRatings anticipates that other institutions will follow JPMorgan's lead.

"Weexpect issuance of this new asset class to grow as banks look to boost ROEs andtransfer credit risk of mortgage loan portfolios retained on balance sheet,"the rating agency said.

JPMorganand a number of its banking peers have generally opted to retain the prime jumbomortgages they produce on their balance sheet — or, alternatively, pursue whole-loansales — though the company did continue to securitize loans its conduit had amassed.Several market participants, including executives at mortgage REITs and , have referencedbanks' inclination to hold mortgages on their balance sheet as one of the challengesthey have faced in getting prime jumbo RMBS deals done.

S&PGlobal Ratings' revised full-year outlook anticipates continued low levels of primejumbo RMBS issuance as sponsors find that alternative execution provides economicsthat are more favorable than securitization.

But inaddition to optimism about additional portfolio risk-transfer deals like Chase MortgageTrust 2016-1, S&P Global Ratings also pointed to non-qualified mortgage transactionssuch as COLT 2016-1 Mortgage Loan Trust as a potential source for a pick-up in activity.

The transaction,which closed in late June, was backed by a pool of fixed- and adjustable-rate, primeand nonprime mortgages with aggregate principal balance of $161.7 million, accordingto DBRS. Caliber Home Loans Inc.,an affiliate of Lone Star Funds, served as originator and servicer for all of theunderlying loans, which had been produced so as to satisfy the U.S. Consumer FinancialProtection Bureau's ability to repay rule.

A re-performingdeal may soon come to market in what would represent one of the first RMBS-relatedtransactions of the second half of 2016. CerberusCapital Management LP's FirstKeyMortgage LLC submitted documentation to the SEC on July 13 regardingTowd Point Mortgage Trust 2016-3. FirstKey's previous Towd Point deal closed inMay and was backed by seasoned performing and re-performing mortgages with aggregateprincipal balance of approximately $874.8 million.

The amountof nonagency RMBS outstanding has plunged over the years, according to S&P GlobalRatings, to approximately $856 billion through the year-to-date period from $1.92trillion in 2009 as issuance has waned during and after the financial crisis.