Residential Mortgage-backed Securities Market Research Articles

Creditor protection and credit ratings in the US RMBS market

AbstractMore than a dozen years after the Dodd‐Frank Act was introduced, we investigate whether credit ratings for the US residential mortgage‐backed securities (RMBS) market differ given the different levels of creditor protection across the US states. Our paper provides three results. First, for the period 2017–2020, we provide evidence that there is inconsistency between credit rating agencies (CRAs): only for Dominion Bond Rating Service Morningstar (DBRS) and Moody's, we observe that the credit ratings for securitization tranches differ given different creditor protection levels across states. Second, in states with higher creditor protection, the relatively new CRAs, DBRS and Kroll Bond Rating Agency (KBRA), are more likely to provide more optimistic ratings than CRAs historically present in the rating market (Moody's, S&P, and Fitch). Third, issuers appear to issue larger deals in US states that are more creditor friendly.

A Study on Prepayment Risk of Residential Mortgage-backed Securitization in ChinaA Case of "JIAMEI 2018-1 MBS Program"

The Residential Mortgage-Backed Securities market (RMBS) has played a large role in enhancing the liquidity of mortgages, and in relieving the pressure of capital constraints on commercial banks. There are three main risks associated with residential mortgage-backed securitization: prepayment risk, interest rate risk, and default risk. This paper analyzes the prepayment risk in the "JIAMEI 2018-1"RMBS, the largest single RMBS product of the Postal Saving Bank of China (About 14 billion RMB). We introduce the JIAMEI 2 018-1 and study the factors that affect its prepayment risk. Using data, we conclude that the products involved in this case have comparatively low prepayment risk, even under the double influence of the housing finance policy tightening and the impact of the COVID-19 Pandemic.

Navigating the 2023 US Housing Market: Impact on Residential Mortgage-Backed Securities

This article discusses the outlook for the US housing market and its expected impact on the trading dynamics of residential mortgage-backed securities (RMBS) in 2023. Despite the current reduced affordability of housing due to higher mortgage rates and surging home values, single family home prices are unlikely to experience a sharp decline, with growth expected in the second half of the year. The limited housing supply will lead to increased upward pressure on home prices and stronger performance in RMBS. Non-Qualified Mortgage (non-QM) products may face a challenging year in 2023, with delinquencies and losses expected to rise. Credit performance will be critical, and demand for affordability products is likely to increase. Overall, the outlook for the RMBS market remains challenging due to rising interest rates, tightening monetary policy, and the expected increase in the supply of MBS. However, the high level of home equity in the US housing market will create skin in the game for borrowers as well as higher collateral values to protect against credit deterioration.

Intensified Competition and The Impact on Credit Ratings in the RMBS market

AbstractIn this paper, we empirically investigate the impact of intensified competition on rating quality in the credit rating market for residential mortgage‐backed securities (RMBS) in the period 2017–2020. We provide evidence that competition between large credit rating agencies (CRAs) (Moody's and Standard & Poor's) and newer smaller ones (Dominion Bond Rating Service Morningstar and Kroll Bond Rating Agency) creates credit rating inconsistencies in the RMBS market. While a credit rating should solely represent the underlying credit risk of a RMBS, irrespective of the competition in the market, our results show that this is not the case. When competitive pressure is higher, both large and small CRAs tend to adjust their rating standards (smaller CRAs react to large CRAs and vice versa).

Financiarización y crisis del mercado hipotecario de viviendas nuevas para los trabajadores en México

Este trabajo tiene por objetivo analizar la organización y transformación institucional del sector financiero hipotecario en México. Para ello se realiza un análisis sobre el número y montos de inversión y circulación, tanto de créditos hipotecarios como de Bonos Respaldados por Hipotecas (BORHs). A partir de la crisis financiera global originada en el mercado hipotecario estadounidense, paradójicamente, se ha venido fomentado el crecimiento de la propiedad hipotecaria en México a través de su financiarización. Este proceso se ha llevado a cabo mediante el incremento acelerado de la participación en el mercado de BORHs por parte de instituciones públicas de financiamiento de vivienda; en contraste con el repliegue de entidades financieras privadas e instituciones bancarias. Al incremento en la emisión de bonos y el otorgamiento de créditos hipotecarios, corresponde también un incremento en la cantidad de viviendas deshabitadas; indicio de una crisis provocada por la sobreproducción de viviendas.

The Durability of Legislative Benefits and the Role of the Executive Branch's Settlement Authority

Following the 2008 Financial Crisis, the U.S. Department of Justice required several large financial institutions to pay large cash settlements for their role in collapse of the residential mortgage-backed securities market. A fraction of these cash settlements was instead funneled to government-approved nonprofit beneficiaries, many of whom had had their government grants reduced by Congress. I argue that this transfer is an insurance contract that the government uses to improve the durability of contracts between special interest groups and the legislature.

Safe Harbor for Derivatives in Bankruptcy: Overstayed Its Welcome?

The safe harbor for derivatives in bankruptcy has developed over the course of the last four decades into a very powerful tool for derivatives counterparties. The safe harbor’s overall effect is to allow counterparties to terminate their derivatives instruments and immediately collect their collateral upon the debtor’s initiation of a bankruptcy. This effect flies in the face of the Bankruptcy Code’s overarching principles, which are to ensure debtor rehabilitation and equality of distribution amongst creditors. By allowing derivatives counterparties to immediately terminate and close out their positions while the other creditors are stayed, both the debtor and other creditors are severely harmed. As the safe harbor contravenes the purpose of the Bankruptcy Code, it is important to consider why it was enacted into the law. This paper begins with a detailed look at the creation of the safe harbor over time. It all began with the enactment of the Bankruptcy Code in 1978, which contained a narrow safe harbor for certain derivatives instruments. Amendments to the Bankruptcy Code in 1982, 1984, and 1990 all served to dramatically increase the breadth, scope, and power of the safe harbor provisions. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 as well as the Financial Netting Improvements Act of 2006 were the final modifications to the safe harbor, and continued the pattern of enlarging its power. Overall, the safe harbor has consistently grown over time as the derivatives market increased in size and complexity. The paper next takes a detailed look at the legislative history over the decades to ascertain the purposes behind the safe harbor provisions. The legislative history paints a relatively consistent picture over all of the various amendments to the safe harbor about why this legal regime was created. The primary purpose behind the safe harbor provisions is, and has always been, to eliminate systemic risk. There has long been a fear that the size, complexity and interconnectedness of the derivatives market were so great that without special treatment it would all eventually come crashing down. However, there is also a discernible secondary purpose behind the safe harbor provisions, which is to clarify the protections for all market participants and create consistent, settled expectations for all so that the market may function effectively. As derivatives developed in complexity over time, industry participants clamored for legislation to clarify what protections extended to these new instruments and players, and Congress acquiesced to their requests. Having deduced the purposes behind the safe harbor, the next step is to determine whether those purposes were fulfilled in relation to the Financial Crisis of 2007-09. Substantial evidence from the collapses of Bear Stearns, Lehman Brothers, AIG, and the entire residential mortgage-backed securities market suggests that not only did the safe harbor fail to achieve its stated goal of reducing systemic risk, but actually backfired and increased systemic risk, and thereby worsened the financial crisis. In light of this evidence, the paper ends by discussing two routes for reform. The first option is to repeal the safe harbor in light of the creation of the Orderly Liquidation Authority under the Dodd-Frank Act. The Orderly Liquidation Authority is a financial resolution system created specifically for the largest institutions capable of producing systemic risk. However, this paper supports the second option, which is less drastic and the one less likely to upset settled expectations. That second option proposes to narrow the safe harbor provisions in various ways so that they are more appropriately targeted at achieving their goal of reducing systemic risk.

RMBS Commentary: Non-Traditional RMBS Flourishes as Prime Jumbo Fades

The rebound in housing prices has reduced the industry’s loss expectations for residential mortgage-backed securities (RMBS) and improved investor sentiment regarding the housing market. But the positive sentiment hasn’t bolstered the private-label, or nonagency, RMBS market. There are three key reasons for this. First, the issuers find it easier to navigate the government-sponsored enterprise (GSE) market. Second, selling loans through private-label securitization remains uneconomical and unfavorable for the issuers as compared with an agency sale (selling loans to GSEs) or a whole loan sale (selling loans into the secondary market). Third, issuers remain skeptical about opening up the credit box. This dry spell in jumbo issuance hasn’t affected issuances of resecuritization, commonly known as re-REMICs, or issuances of transactions backed by nonperforming loans and reperforming loans. There is a steady flow of issuance on these transactions, but most are nonrated.

What Lies Ahead: The Challenges of Securitizing Non-Qualifying Mortgage Loans

Since the financial crisis, the private-label residential mortgage-backed securities (RMBS) market has remained stagnant, in large part because of regulations put in place during the aftermath of the crisis. Although firms have recently begun to revisit private-label securitization, uncertainty in the market is still strong. This article reviews the securitization process, examines the challenges that the private-label RMBS market faces, and explores the opportunities that non-Qualified Mortgage lenders have if they target the right borrowers and follow certain policies and procedures.

The Rebirth of Securitization: Where Is the Private-Label Mortgage Market?

In the wake of the financial crisis, new securitization activity ground to a halt in all asset classes that did not have an implicit or explicit government guarantee. Although securitization has since resumed in most asset classes, including automobiles, credit cards, collateralized loan obligations (CLOs), and commercial mortgage-backed securities (CMBSs), the private-label residential mortgage-backed securities market remains stagnant. This article discusses why the residential mortgage market experience has been so different and provides guidance about what remains to be fixed.

Lessons Learned from the Crisis and Thoughts on a New Non-Agency Mortgage Target Operating Model

Lenders and investors have not been able to put forth a non-agency residential mortgage-backed securities (RMBS) business model, citing such plausible reasons as regulation impacting both originations and servicing operations, Basel III capital rules, rating agency challenges, lack of clarity around rules governing representations and warranties, credit-crisis legal precedents still evolving, and to some degree, the non-financial costs of reputation, perception, and negative publicity. Successful architects of a new non-agency mortgage platform/targeted operating model will need to pay close attention to lessons learned from the credit crisis, converting those lessons into a business model and risk-mitigating enhancements. In this article, the authors examine the current struggles of the non-agency RMBS market, factors that contributed to the breakdown of this market, and possible lessons learned that could play a part in the reemergence of this industry. They focus on lessons learned and opportunities for improvement in underwriting procedures, servicing operations, securitization structures, and related business practices. <b>TOPICS:</b>MBS and residential mortgage loans, legal/regulatory/public policy

Mortgage Credit Ratings and the Financial Crisis: The Need for a State-Run Mortgage Security Credit Rating Agency

With the exception of the investment banks, there probably has been no other financial actor with as great a hand in causing the current financial crisis as the major credit rating agencies (CRAs). CRAs gave residential mortgage backed securities (RMBSs) and RMBS-collateralized debt obligations (R-CDOs) inflated credit ratings, enabling financial institutions and other investors to buy trillions of dollars worth of these securities. Eventually, it became apparent that these securities were overvalued, which—because of mark-to-market accounting rules—forced huge write-downs for those who owned them. Consequently, the balance sheets of many financial institutions were decimated, some became insolvent, and the whole financial system was pushed to the brink of collapse. Today the private mortgage securitization market is virtually non-existent, and only mortgage securities guaranteed by the Government Sponsored Enterprises (GSEs), Fannie Mae, Freddie Mac, and Ginnie Mae, are bought by investors. Responsibility for the frozen private mortgage securitization market has been widely assigned to the CRAs. Because mortgage securitization is so important to reviving the economy, the federal government, through its acquisition and subsidization of the GSEs, has become an underwriter and purchaser of RMBSs and R-CDOs. It is not a desirable solution, however, for the government to act as a long-term mortgage security investor. This Note’s proposal hopes to revive private mortgage securitization with significantly less expansive government intervention. To restart the non-GSE RMBS and R-CDO market and to ensure its continued functioning, this Note argues that a federal government entity (“the Agency”) needs to take the place of the CRAs in rating RMBSs and R-CDOs. Inaccurate RMBS and R-CDO ratings are caused in large part by the “issuer pays” system of financing, whereby issuers of securities pay the CRAs for credit ratings, thus creating an obvious conflict of interests. However, some academics and the CRAs claim that the CRAs’ incentive to maintain a strong reputation (“reputational capital”) outweighs their desire in any individual case to profit from inflated ratings. The current financial crisis, however, disproves this claim and instead indicates that the conflict of interests inherent in issuer financing have overcome the reputational capital constraint and resulted in inflated RMBS and R-CDO ratings. Since the issuer pays model is unlikely to change, the CRAs will continue to be incentivized to inflate RMBS and R-CDO ratings, and investors and regulators will probably distrust CRA ratings of R-CDOs and RMBSs for the foreseeable future. On the other hand, this Note will show that a government entity can effectively rate R-CDOs and RMBSs.

The American Securitization Forum’s Project RESTART: The Securitization Industry’s Attempt to Restore Investor Confidence

The residential mortgage-backed securities (RMBS) market, which served as the backbone of housing finance in the United States for decades, ground to a complete halt in 2008 as a result of losses emanating from lax underwriting of mortgage loans and the profusion of mortgage products that proved to be inherently risky during a period of declining home prices. Although many originators have tightened their underwriting standards since mid-2007 and abandoned the riskiest types of mortgage products, the RMBS market will not resume its critical function in any meaningful way until investor confidence in the quality of the mortgage loans backing RMBS, and the integrity of RMBS structures, has been restored. This article examines the American Securitization Forum’s Project on Residential Securitization Transparency and Reporting (Project RESTART), which is a broad industry-based effort to restore investor confidence in the RMBS market by increasing loan-level transparency and improving the RMBS infrastructure. <b>TOPICS:</b>MBS and residential mortgage loans, CMBS and commercial mortgage loans, real estate

Valuation of Residential Mortgage-Backed Securities with Proportional Hazard Model: Cumulant Expansion Approach to Pricing RMBS

This paper proposes a pricing formula for residential mortgage-backed securities (RMBS) with the proportional hazard model. First, we develop basic models of mortgage contracts with prepayment risk in the intensity-based framework. Next, assuming the proportional hazard model to describe prepayment risk, which is used as a typical prepayment model both academically and in practice; a general pricing formula for not only RMBS, but also IO and PO is derived by using the cumulant expansion method. Furthermore, it is also shown that the formula is applicable to various types of the proportional hazard models. Finally, numerical examples based on Japanese RMBS market data demonstrate that the formula is very accurate and useful in practice.

Over-Indebtedness, Predatory Lending, and the International Political Economy of Residential Home Mortgage Securitization: Comparing the United States' Subprime Home Mortgage Lending Crisis to Home Finance in the United Kingdom, Germany, and Japan

Following the United States, many countries around the world have increasingly turned to structured finance, also known as securitization, to fund loan portfolios. This trend has taken on troubling undertones in the wake of widespread default in the American sub-prime residential mortgage backed securities market. This essay provides a brief introduction to the business practices of, and law governing residential mortgage securitization in, the United States. Moreover, it surveys the use of securitization in three influential countries: the United Kingdom, Germany, and Japan. In comparison to these countries, relatively lax regulation, poor oversight of intermediary originators, and volume-oriented underwriting have all contributed to widespread foreclosures in the United States. Private structured finance of American sub-prime mortgages has created economic incentives that promote consumer over-indebtedness as well as predatory lending. Furthermore, by drawing politically powerful financiers into aggressive and ethically questionable lending, residential mortgage backed securitization tends to empower opponents of consumer protection law. Drawing on the U.S. example, caveats for other countries are offered.

Legal and Regulatory Factors that Impede and Facilitate the Residential Mortgage-Backed Securities Market in Australia

Abstract In a residential mortgage-backed security (RMBS) program, a bank or other financial institution sells its rights in a pool of home loans to a vehicle (SPV), which pays for the asset pool by issuing fixed or floating rate bonds in the financial markets to institutional investors. The SPV finances the interest and principal payments under these bonds from the pooled home loan repayments. The SPV is a special purpose vehicle in the sense that it is established especially, and solely, for the of acquiring the asset pool and issuing bonds against it. This paper outlines the findings and contributions of the author's PhD thesis entitled, Residential Mortgage Securitisation in Australia: Suggestions for the Reform of Commercial Law and Practice. The thesis analysed the features of the existing law and regulation that facilitate and hinder the market by using a public benefit test framework, which involves an assessment of the economic, financial and social benefits and costs associated with the current legislation and regulatory reform options. A summary of the analysis and assessment of the current law and regulation that facilitate and hinder the development of the market for RMBSs in Australia and the main findings of the thesis are outlined in the paper.