Congress is getting closer to passing legislation that would help legacy MBS and ABS transition away from LIBOR; there’s a securitization angle in Zillow’s move to discontinue its fix-and-flip business.
The difference between interest rates on non-QMs in MBS and the interest rate paid to investors in the securities is helping to protect investors from losses. Excess spread in the sector increased as seasoned loans were repackaged.
Changes to underwriting standards and home price appreciation helped investors in non-agency MBS largely avoid losses during the pandemic. By comparison, cumulative losses on subprime MBS during the financial crisis of 2008 hit nearly 20%.
Months of improvements in the performance of non-agency MBS stalled earlier this year, though delinquencies resumed a downward trend at the end of March.
After complaints from MBS investors regarding the reporting of performance of loans in non-agency deals, the Structured Finance Association released voluntary standards that could address the issue.
Prepayments helped pay down senior bonds, making the remaining subordinated tranches the larger share of an expanded-credit deal’s balance. Result: A larger cushion against potential losses, DBRS said.
Performance on non-agency MBS has improved after the spike in late payments seen in the spring. However, borrowers who are still delinquent could prompt losses for investors.
If the coronavirus continues to wreak havoc and the federal government doesn’t provide additional stimulus, the performance of residential MBS is expected to take a significant hit.
As borrowers in prime non-agency MBS transition out of forbearance plans, investors in the deals could experience reduced cashflows due to interest shortfalls.
Sterling Bank has offered to buy back all non-QMs after uncovering various problems with its lending program. Between May and July, the bank repurchased loans from five MBS, taking a loss.