In Search Of Non-Agency RMBS

In many ways, trying to locate signs of activity in the market for non-agency residential mortgage-backed securities (RMBS) is similar to locating evidence of extraterrestrial life. In both cases, the searcher peers into a vast darkness with the vague hope of confirming some evidence of movement.

And in both cases, occasional blips of commotion often provide a rush of hopefulness – reports of UFOs for the alien hunters, rumors of potential RMBS offerings for the investors – but, ultimately, they never quite lead to satisfactory conclusions. In fairness, however, one can assume that an RMBS recovery will take place before E.T. and his friends land on Earth.
‘The market is moribund, but it is not dead,’ says Robert Stowe England, author of the book ‘Black Box Casino: How Wall Street's Risky Shadow Banking Crashed Global Finance.’

Indeed, it would be incorrect to proclaim that the non-agency RMBS market has been completely without life.

‘Thanks to Credit Suisse and Redwood Trust, there has at least been some activity,’ observes Tom Millon, founder and president of Capital Markets Cooperative, headquartered in Ponte Vedra Beach, Fla. ‘Both institutions have been expanding efforts and reaching more broadly and deeply into the mortgage space for collateral.’
Nonetheless, Millon acknowledges his bafflement that the market is still a shadow of its former self. ‘I would like to think that more banks would get involved,’ he says. ‘I have not heard of anyone else contemplating an issuance on their own.’

Frank Fiore, president of Melville, N.Y.-based MATCHbox LLC, concurs. ‘People are sitting on the sidelines much longer than I anticipated,’ he says. ‘Redwood Trust has an investor base that has an appetite for this. But they are doing this in very small chunks.’

So what's holding up the market's return? England says that the RMBS market can return to vibrancy once investors are certain that the aftershocks of the 2008 economic crash have subsided for good.

‘Investors in RMBS have to regain their confidence in the ability of the market to produce reliable and desirable securities,’ he explains. ‘RMBS cannot revive until people are convinced the housing recovery has begun and things are on the mend.’

But that might be easier said than done.
‘It will take years to heal,’ predicts Richard Zahm, director of Darien, Conn.-based ORFEE Fund. ‘The industry needs to reintroduce the concept that buying a house is a good investment.’

Todd Hempstead, senior vice president for investor relations at CMG Financial, headquartered in San Ramon, Calif., believes that a lack of stability in regard to home prices continues to agitate would-be investors.

‘People are worried about home prices – we've been plodding along for a number of years, and we probably have not reached bottom everywhere,’ he says.

Hempstead also notes that the dominant players in the secondary market, Fannie Mae and Freddie Mac, enjoyed a ‘substantially solid second quarter’ after nearly four years of tumult, thus strengthening the government's dominance of the market at the expense of reviving the non-agency product. Hempstead adds that many regulatory aspects of mortgage banking are still works in progress, thus delaying the settling of a solid foundation.

‘People are starting to get a little more clarity and guidance under Basel III, and there are still some things under Dodd-Frank that need to be addressed,’ he says. ‘When this happens, it will give people sense of comfort about issuing securities.’

Also offering a wild card factor is the federal RMBS Working Group, launched in January by the Obama administration to investigate the potential role of RMBS issuers in the 2008 economic crash. However, there is no announced date for when its findings will be publicly announced.

For his part, Fiore believes the working group will have little impact on the market's recovery. ‘I've heard very little about it,’ he says. ‘I've not heard any rumblings at all.’

Still, one industry expert is optimistic that the non-agency RMBS market will become more attractive to investors in the near future.

‘There are a lot of pros to investing in this product now,’ says Teresa Blake, practice director of lending solutions at Wipro Gallagher Solutions, based in Franklin, Tenn. ‘Lenders are very smart and are actively managing risk. If you were thinking about RMBS, this is a smart time to be investing. As defaults decline and lenders tighten credit and add overlays, this becomes a good space to be in.’

However, Millon forecasts that investors will continue to have limited non-agency choices for the next 12 months.

‘There will be more deals done by Credit Suisse and Redwood Trust,’ he says. ‘But I don't know of anyone else getting into the space.’

Phil Hall is the editor of MortgageOrb. He can be reached at


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