RMBS Remains Supported by Strong Fundamentals
by Semper Capital, on Apr 9, 2021
Mortgage borrowers drastically outperformed the initial pandemic forecasts for forbearance take-up and delinquency. Most collateral experienced all-in levels of forbearance below even the initial bull case forbearance range. Additionally, since April 2020, well over 50% of the loans that have entered forbearance have subsequently cured or paid in full. Across all RMBS sub-sectors, mortgage credit quality remains high. Newer loans have been underwritten with much stronger regulatory and industry standards post 2008. Additionally, outstanding legacy loans have improved in quality as borrowers have built equity through HPA and amortization, and weaker loans have since defaulted and/or liquidated.
Home equity, which has the strongest negative correlation to default probability, is at record high levels nationally. Loan-to-value ratios (LTV) for legacy bonds are generally as low as 50% on average, while next generation bond LTVs generally range from 50% to 80%. Low mortgage rates have led to a record level of borrowers refinancing. These high rates of prepayment in conjunction with low levels of default, have led to significantly shorter mortgage bonds with much higher levels of credit enhancement. This is expected to lead to accelerated credit upgrades, spread tightening, and price appreciation, especially in mezzanine and subordinate profiles. While approximately 7 million loans were refinanced in 2020, an extremely high number in historical context, a greater number than that remain eligible for refinancing in 2021, even following the first quarter’s rate rise.
Home equity, which has the strongest negative correlation to default probability, is at record high levels nationally. Loan-to-value ratios (LTV) for legacy bonds are generally as low as 50% on average, while next generation bond LTVs generally range from 50% to 80%. Low mortgage rates have led to a record level of borrowers refinancing. These high rates of prepayment in conjunction with low levels of default, have led to significantly shorter mortgage bonds with much higher levels of credit enhancement. This is expected to lead to accelerated credit upgrades, spread tightening, and price appreciation, especially in mezzanine and subordinate profiles. While approximately 7 million loans were refinanced in 2020, an extremely high number in historical context, a greater number than that remain eligible for refinancing in 2021, even following the first quarter’s rate rise.
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