The market for private-label mortgage-backed securities, buoyed by low interest rates and the financial stability of issuers, is on track for another strong year, according to Moody's Investors Service.
Volume more than doubled in 1998, the third straight year of gains, a report by Moody's says. The high number of refinancings-an estimated 51% of originations-and home purchases kept volume strong.
The increased availability of alternative-A and fixed-rate loans also helped bolster volume, the report said. Fixed-rate mortgage loans accounted for more than 95% of securitization volume in 1998.
"We do expect to see continued interest in refinancings, which means there is probably going to be more product coming into the securitization market," said Linda A. Stesney, managing director at Moody's. "It will be a healthy year for the mortgage-backed securities market."
The credit quality of new jumbo mortgages is expected to remain stable in 1999. The report noted that private-label originators were better capitalized, had more established track records of origination, and faced fewer gain-on-sale writedowns than asset-backed securitizers. The report noted some trends among lenders and in the secondary market.
One innovation presented in the market, the report said, was Freddie Mac's Moderns. This derivative security allowed the government-sponsored enterprise to reinsure a portion of its risk exposure on a sizable pool of mortgage loans it guaranteed.
Lenders' increased use of automation in origination also had a significant effect on the private-label market. Consumer credit scores were used to evaluate borrowers' credit risk. Mortgage scores - combining consumer credit scores with property and loan information - were used in approval decisions. And some lenders also began to use automated appraisal systems to measure the value of properties.
The ratings agency says it found credit standards weakened by the use of a simplified origination process for refinancing customers. The streamlined process requires less documentation, and does not require full appraisals for new loans. This created "less thorough credit evaluations," the report said.
The inclusion in some regular jumbo securitizations of alternative-A loan volume, which accounted for close to $13 billion of private-label volume in 1998, also increased the credit risk of those pools, the report said.
Lenders offer alternative-A loans to borrowers looking for higher loan- to-value ratios or whose incomes prevent them from qualifying for standard jumbo or conforming loans.
The top private-label securities issuers, including Countrywide Home Loans, Norwest Mortgage, GE Capital Mortgage, Citicorp, Bank of America, and PNC Mortgage, will face the challenge of maintaining their servicing rights, Ms. Stesney said.
Because consumers do not automatically refinance with the same lender, there has been "pressure on originators to do streamlined refinances," she noted. This pressure has led to reduced "checks and balances" on originations, she said.
Moody's said its credit enhancement levels for private-label mortgage- backed securities should remain at similar levels to 1998, because the ratings incorporated technology changes that issuers have introduced.
