Standard & Poor's Corp. said it expects the market for mortgage-backed securities to remain healthy throughout 2000 but not to reach the record heights of 1998.
Origination volume is threatened by the possibility that interest rates will continue to rise, the ratings agency said. Indeed, the chief culprit for a decline in 1999 was rising interest rates. Rates for 30-year, fixed-rate mortgages were at 6.83% at the beginning of 1999 but rose to 8.05% by yearend, the ratings agency noted.
A 5.29% increase this year in the loan ceiling for Fannie Mae and Freddie Mac purchases, to $252,700, also could hurt securitization volume. This change is expected to make an additional 82,000 loans, valued at more than $21 billion, eligible for Fannie and Freddie to buy. The result would be fewer loans to be securitized, said Terry G. Osterweil, director in Standard & Poor's structured finance ratings group.
The percentage of loans securitized in the private-label, mortgage-backed securities market - including jumbo loans - will continue to shrink, Mr. Osterweil said. Securitization volume for all residential mortgage-backed securities fell to $92 billion last year, from $134 billion in 1998, the ratings agency said.
Fannie's and Freddie's buying of nonprime loans will also reduce the pool of loans available for private-label securitization, said Thomas Marano, senior managing director at Bear, Stearns & Co. Issuance will fall 30% to 40% simply because of interest rates, he said.
"As Fannie Mae or Freddie Mac increase their purchases of products that are traditionally non- agency-wrapped or guaranteed, that causes the private sector to become somewhat more aggressive in the type of loans that they want to originate and that creates a broadening in the type of products that are out there," he said.
Expanded buying by Fannie and Freddie would be good news for borrowers because it would drive down rates, Mr. Marano said, but Wall Street will "have to become more aggressive in trading the securities in the secondary market" and in creating innovative securities.
Rising interest rates led to a surge in S&P's AAA credit enhancement levels, to 4.52%, in the security pool last year, from 4.29% in 1998, the agency said. More risky loans are in the marketplace now because more loans are being made with "less than full documentation" and because higher home prices are increasing the frequency of cash-out refinancing, the company said.
Higher interest rates, proposed legislation to regulate the subprime industry, and government-sponsored enterprises' continued activities in the "higher credit band" of the subprime sector could all threaten volumes, the ratings agency said.
Growth areas for securitization identified by Standard and Poor's include reverse mortgages, tax liens, nonperforming loans, and loans that previously were in default, known as reperforming loans.
