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» VISIT US ONLINE @ DSNEWS.COM 65 COVER STORY INDUSTRY INSIGHT POINT- COUNTERPOINT MARKET PULSE the sale of mortgages and also the performance of bonds. With the cessation of subprime lending and the advent of the Great Recession, the mortgage industry, along with related industries, entered a dark period from 2008 to early 2012. "However, during this time, there was one non-agency RMBS issuer that remained active, and that was Redwood Trust in California," Hurt said. "is company was consistent in its offerings but certainly not on the scale of business experienced between 2006 and 2008. ey were offering securities collateralized by high-quality, non-conforming mortgage borrowers." Moving forward to 2013, uncertainty was the mood among both originators and issuers over the Consumer Financial Protection Bureau (CFPB)'s forthcoming Qualified Mortgage (QM) rules and eventual enforcement. "In this environment, most people were staying away from securitizations because of their concern about capital and fiduciary responsibility," he explained. "Although there was money available to invest, investors stayed on the sidelines because no one understood the new rules very well. In 2013, the fog lifted a bit, and some had a better sense of the regulatory environment." CFPB issued explanations of what was to be expected of lenders and borrowers. In the first and second quarters of 2013, a number of players re-entered the market, Hurt explained, and there was a flurry of offerings other than those from Redwood Trust. Other participants in the secondary market moved into the issuance market as well but to a limited extent. "However, in the third and fourth quarters of 2013, most hit the brakes, realizing that economics for the securitization market had changed," Hurt said. "In today's environment, the economics of the transactions are not as attractive as alternative whole-loan sale opportunities." Whole-loan trades have picked up the slack, Hurt explains, and many investors are buying mortgages and putting them on their books instead of selling them to someone else. During the fourth quarter of 2013, most investors seemed to prefer a whole-loan execution. "e non-agency RMBS issuance market did not die, but it is no longer the most opportune place to sell these assets," Hurt said. He noted that economics provides a thin line as to whether a securitization is better than a whole-loan sale. "It's no coincidence that Redwood Trust has not been issuing at all in the last few months," he explained. "GSEs are still buying 85 percent of the loans, although one new company has emerged, and that is Shell Point, along with New Penn. ese are companies created and organized by Lew Ranieri, often considered to be the godfather of mortgage- backed securities, which began in the 1970s." If the non-agency issuance economic environment returns to an attractive level, Hurt believes securitizations will take off again. If not, whole-loan transactions will continue to dominate secondary market sales. Everyone understands the spread issue, and investors are well equipped to make a move to purchase securitizations as soon as the market allows, Hurt said. "What people need to realize is that the mortgage business is not what it was," he said. "We are not going to have a $2 trillion to $3.5 trillion origination market any time soon. Volumes are not even going to be what they were in 2012 and 2013." is downward shift in originations will impact gestation processes and limit the ability to assemble large amounts of mortgages into one or more packages to achieve sufficient size for a transaction. "is means that lenders will have to find something else to do with loans they have originated instead of waiting for an appropriate size to offer in an RMBS package," Hurt explained. "is is the present day environment for securitizations." AND NOW, THE BRIGHT SPOTS Although the quantity of RMBS sales is down considerably compared to pre-housing crisis days in 2007, Rui Pereira, managing director of the RMBS Group, Fitch Ratings, believes the quality of more recent offerings is much higher than before. "e securitizations being done today are very different from what was done pre-crisis," Pereira said. "e collateral backing transactions has been of exceptional credit quality, and the performance to date has been stellar." Pereira suggested the RMBS market is slowly recovering, but numerous challenges persist that continue to weigh on the market's restart. He pointed to GSE reform. "Loan limits are still high and guarantee fees attractive, making the GSE execution attractive relative to other alternatives." he explained. "Nearly 90 percent of mortgage loan production is still going to the GSEs, and this dynamic is unlikely to change until we see more meaningful reform." Another issue Pereira pointed out is a strong bid for jumbo mortgage assets from portfolio lenders. "Large banks like the credit profile of these assets and can finance them at attractive rates on their balance sheets," he said. "is has also limited the supply of collateral in the RMBS market." Pereira continued: "e economics of executing RMBS transactions also weakened significantly in the latter part of 2013 in response to rising rates and skittish investor demand. is caused some issuers to hold off on transactions and execute whole-loan trades instead. "e industry is also adapting to new regulations including the new QM rules released earlier this year. ese changes may also weigh on the market in the early part of 2014 as lenders and issuers focus on implementing new compliance processes." Pereira foresees a recovery for RMBS sales, although a slow one. "My sense is that we will continue to see issuance this year, but it will continue to be a slow and gradual recovery," he said. "However, I think we will see some incremental growth compared to the volume we saw last year." Overall, Pereira believes the industry is adapting, and the RMBS market is recovering. However, it will take a while. NON-AGENCY MORTGAGES BECOMING RARE Regarding the future of securitization and mortgage-backed securities, Ron D'Vari, CEO and co-founder of New Oak Capital, said there are not going to be as many players on the field as there were before the new CFPB rules went into effect. is means there will not be as many loans available to package and sell to investors. "is new environment in which lenders must

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