GSE credit risk transfer gross new issuance has already hit record annual volumes, driven by high mortgage originations and refinancings. Indeed, speakers participating in SCI’s ‘Post-pandemic GSE CRT Performance’ webinar last week agreed that the fundamentals for the GSE CRT market remain robust and support a positive outlook for 2022.
While GSE CRT gross issuance is at an all-time high, net issuance levels are currently flat to negative, due to strong mortgage loan prepayment rates. “Covid was a significant deleveraging event for credit risk transfer investors,” noted Seamus Fearon, evp, credit risk transfer and services at Arch MI. “We’ve had over 20% home price appreciation since March 2020, resulting in borrower deleveraging, and structural deleveraging in the form of increasing credit enhancement from very high prepayment levels. Consequently, investors have had more dry powder to deploy in the CRT market in 2021.”
Gross issuance is expected to increase further in 2022, with Fannie Mae returning to the CRT market following amendments to the Enterprise Regulatory Capital Framework in September (SCI 19 October). Net issuance is also likely to increase, due to a decline in prepayment rates. Both of these factors should create upward pressure on spreads and a potential buying opportunity for investors relative to spread levels at the end of 2021, according to Fearon.
Meanwhile, Guy Carpenter md Tim Armstrong noted that the countercyclical feature of the enterprise capital rule provides an additional incentive for GSE CRT issuance. “Strong HPA is likely to drive capital requirements up for the GSEs, which could respond by increasing the detachment points and therefore the size of CRT deals.”
With fast repayment speeds delevering CRT deals, the GSEs are recycling capital by exercising call options and mitigating the reduced capital efficiency of bonds by launching tender offers (SCI 15 November). Armstrong expects such activity to pick up heading into 2022.
Fearon suggested that tender offers and the exercising of call options are signs of confidence from the GSEs that changes to the capital rule will persist for at least the next few years, as well as a recognition of structural and borrower deleveraging. “The GSEs can optimise costs by repurchasing and repackaging loans with lower attachment points and creating skinnier tranches. As such, the capital benefits of CRT are preserved but at a lower cost.”
At the same time, mortgage origination is slowing. But there remains a significant unmet demand for housing and – given continued historically low interest rates – purchase volumes are expected to continue to rise, providing a backstop for the raw materials needed for CRT.
“While refinancing rates will shrink, more in-the-money mortgages remain than in any period prior to 2020. Many borrowers can still realise savings by refinancing, even if interest rates rise,” said Armstrong.
He added: “Many borrowers can’t find new homes, due to the lack of supply, so are choosing to renovate their existing homes. Consequently, we’re seeing a switch from term refinancings to cash-out refinancings to renovate homes.”
In terms of performance, Fearon pointed out that delinquencies have dropped from 6% following the onset of the coronavirus crisis to below 2%, while transition rates from delinquency to current have returned to pre-Covid levels. “We expect curing to continue in the coming months as borrowers exit forbearance. If some of these borrowers are unable to make payments after the forbearance period, they will have built up significant equity in their properties, so will have the option to sell rather than foreclose,” he concluded.
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