The mortgage market faces a big challenge when the Federal Reserve figures out how to unload its massive $1.7 trillion portfolio of agency MBS, but anticipated widening of spreads could at least improve market liquidity. The fixed-income market has seen a sharp decline in trading volume resulting in part from regulatory issues, said Mike Fratantoni, chief economist at the Mortgage Bankers Association, during the group’s annual secondary market conference in New York this week. “Banks have been hoarding liquidity instead of providing it to the market,” he said. Average daily trading volume of MBS has dropped...

In April, the average daily trading volume in agency MBS fell to $187.8 billion, the worst reading of the year and a possible harbinger of problems to come. One market participant, speaking under the condition his name not be used, likened it to MBS buyers “going on strike.” He added: “Right now, you have an illiquid market, and that’s not a good thing.” In December of last year, the MBS trading volume was...

Industry participants, both on their own and with help from the Treasury Department, continue to work on reforms to attract investors to buy new non-agency MBS. Servicing standards will likely play a key role in the reforms, though progress has been slow. The Structured Finance Industry Group published its first RMBS 3.0 “green paper” in August 2014 with a follow-up in November. The Treasury Department has been working with industry participants toward the issuance of a benchmark non-agency MBS since at least September 2014. Analysts at Fitch Ratings stressed...

Issuance of conduit commercial MBS has been significantly lower than expected this year, according to Bank of America Merrill Lynch. Some of the expected volume appears to have shifted to single-asset deals, while a number of investor-related factors have also likely limited issuance. BAML expected $85.0 billion in conduit commercial MBS to be issued this year, a nearly 50 percent increase compared with 2014. However, just $23.0 billion in conduit commercial MBS had been issued this year through mid-May, suggesting that volume might stay level compared with 2014. A number of factors have shifted...

ABS issued in recent years have included a marked increase in the use of electronic contracts, particularly for prime auto deals. Industry analysts note that e-contracts can be treated similarly to physical contracts, though issuers must address concerns from investors, lenders and rating services. “The pace of e-contract adoption has increased, and some prime auto captives are believed by industry participants to be moving to 100 percent e-contract origination by the end of 2015,” DBRS said this week. “The adoption of e-contracts has also occurred across the ABS industry, with subprime auto and timeshare lenders beginning to use them for loan originations.” Use of e-contracts in the auto space has been boosted...

Republicans in the House of Representatives continued their efforts to chip away at the Dodd-Frank Act during a hearing this week by rolling out critics who said the act not only was a poor and ineffective response to the 2008 financial crisis, but also created a host of new problems and could be contributing to the next debacle. Rep. Sean Duffy, R-WI, chairman of the House Financial Services Oversight and Investigations Subcommittee, said a major assumption underlying Dodd-Frank – that the primary cause of the financial crisis was misbehavior by securities market participants – was false. “Main Street lenders are being...

Privately held nonbank mortgage firms – and even some public ones – increasingly are contemplating issuing more debt securities as a way to fund growth. The reliance on debt is seen as a more attractive alternative than going public, which can leave too much of a young company in the hands of outside parties that are merely looking for a quick profit after a lender lists its stock. Then again, not too many mortgage companies are contemplating...

Most real estate investment trusts that invest heavily in residential MBS reported modest declines in the fair value of their MBS holdings during the first quarter, according to an analysis and ranking by Inside MBS & ABS. A group of 16 publicly traded mortgage REITs held a combined $263.94 billion of agency and non-agency MBS as of the end of March. That was down 6.6 percent from the previous quarter, but represented a 1.1 percent increase over the first quarter of 2014. Some 92.6 percent of the group’s residential mortgage securities holdings were...[Includes one data chart]

A unique stop-advance feature included in the jumbo MBS issued by Redwood Trust late last week was viewed favorably by investors, according to officials at the real estate investment trust. “We are pleased not only with the pricing execution on this transaction, but also with the level and depth of AAA investor interest,” Marty Hughes, Redwood’s CEO, said this week. The $356.45 million Sequoia Mortgage Trust 2015-2 included...

Big banks in recent years likely focused their refinance efforts on loans in agency MBS that had been purchased by the Federal Reserve, according to a working paper by economists at the Fed. John Kandrac and Bernd Schlusche noted that agency MBS held by the Fed exhibit faster prepayment rates than MBS held by the rest of the market. While some analysts have pinned the prepayments on refi activities by nonbanks, the Fed economists said they found that Bank of America, Citigroup, JPMorgan Chase and Wells Fargo played a large role in the high prepayment rates for agency MBS purchased by the Fed. The economists noted...