Residential Mortgages and RMBS: 60-Second Market Review and Insights

Originations and Issuances, by the Numbers

New mortgage originations reached $421 billion in Q2 2017, down from $427 billion in Q2 2016 (a 1.41% decrease). Housing debt reached $9.14 trillion in Q2 2017, up from $8.84 trillion in Q2 2016 (a 3.82% increase). Housing debt, at 68% of the $12.8 trillion in national household debt, continues to be far and away the leading form of consumer debt in the United States. Even so, quarterly originations are less than half than they were at their peak of $869 billion in Q3 2005, and housing debt is less than it was at its peak of nearly $10 trillion in Q3 2008, which at the time accounted for 78.8% of household debt.

RMBS is on pace to exceed the $34 billion in issuances in 2016 and $38 billion in 2014, potentially nearing 2015’s $54 billion in issuances. Although the RMBS market has made a comeback, it is a fraction of the peak level of over $7 trillion prior to the 2008 financial crisis, when subprime accounted for 43.4% of all non-agency RMBS issuances.

Performance and Practices

Mortgage loans continue to experience lower delinquency rates than other major consumer debts, such as, auto loans, student loans and credit cards. The 90+ day delinquency rate was 1.5% in Q2 2017, an improvement from 1.8% in Q2 2016. This is far below the peak of 8.9% in Q1 2010 in the wake of the financial crisis.

After years of dormancy, the RMBS comeback has been driven by steady performance and higher quality collateral. Losses may continue to be avoided if lending practices remain conservative.

Looking Ahead

Although the statute of limitations (SoL) is widely believed to have expired with respect to investor and trust claims for misrepresentations against originators and sponsors of pre-financial crisis era RMBS, new claims remain possible against servicers and trustees based on post-closing conduct. As participants in pre-financial crisis RMBS resolve or settle claims and litigation, they can be expected to start the next wave of disputes in the form indemnity claims against other deal participants to recover losses and defense costs.

A recent lawsuit by the U.S. Department of Justice (DOJ) under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) against a Deutsche Bank executive related to his involvement in the sale of pre-financial crisis subprime RMBS certificates has caused consternation for other former subprime executives. FIRREA permits the DOJ to pursue claims against entities and individuals for ten years after a claim arises. In the case of the Deutsche Bank executive, the suit would have been late, if not for a tolling agreement that extended the SoL. Given the cessation of the RMBS market in 2007, we expect 2017 to be the last year in which such suits could possibly be filed for conduct related to RMBS offerings, absent a tolling agreement.