If the expression "time heals all wounds" holds true in the fixed income markets today, investors may finally be ready for an important shift in the composition of Residential Mortgage-Backed Security (RMBS) issuance. As this week's chart illustrates, RMBS origination remains almost entirely dependent on U.S. Government backing through guarantees from Ginnie Mae, Fannie Mae or Freddie Mac. Sizable litigation costs associated with pre-crisis mortgage lending, compliance with new government regulations, and a cautious investor base for newly originated non-agency RMBS have all contributed to the slow pace of securitization.
While the size of issuance since the financial crisis can be labeled as disappointing, the credit quality of post-crisis deals cannot be. A recent Fitch report highlights the "exceptional" performance of post-crisis jumbo RMBS with only eight borrowers more than 90 days delinquent out of roughly 32,000 loans. This performance is clearly one sign of how tight mortgage lending standards have been since the financial crisis. However, a recent Federal Reserve survey shows banks are making it easier and quicker for borrowers to get a mortgage approved.
Key Takeaway: The record $1.2 trillion non-agency RMBS issued during 2006 will certainly not be broken anytime soon (likely a very good thing). However, a freeing up of credit pipes for residential mortgage lending without government support should help sustain the moderate growth levels for both the U.S. housing market and economy as a whole.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.