The private label securitization market and the industry’s response to crisis after 2008 failed, but “the tide appears to be turning quickly,”according to Kroll Bond Rating Agency. Kroll stated Friday that it has observed the re-emergence of more than a dozen non-prime mortgage origination programs that use securitization as a funding source as the U.S. economy wobbles back toward health.
Kroll’s latest report, titled “Credit Evolution: Non-Prime Isn’t Yesterday’s Subprime” stated that today’s non-prime programs are “not a simple rebranding of pre-crisis subprime origination, nor do they signal a return to the documentation excesses associated with ‘liar loans.’” Rather, the asset class meant to serve those with not-pristine credit often has characteristics reminiscent of legacy Alt-A. The asset class is, Kroll said, expansive.
“Underwriting practices have been heavily influenced by today’s consumer-focused regulatory environment and government-sponsored entity origination guidelines,” Kroll reported.
Kroll’s evaluation of these new non-prime programs compelled the agency to recommend specific actions from market participants. First, loans originated under sound compliance with ability-to-repay rules should be outperforming 2005-2007 vintage loans with similar credit parameters. These include LTV and borrower FICO scores. The ability-to-repay rules have, Kroll said, strengthened underwriting, “which should bode well for originations across the MBS space. This is particularly true of non-prime loans, where differences in origination practices can have a greater influence on future loan performance.”
Second, loans that fail to adhere to GSE guidelines for bankruptcy and foreclosure on a borrower’s credit history “should be viewed as having increased credit risk relative to those with similar credit profiles that lack recent disposition activity,” the report stated. Third, Kroll advocates viewing alternative documentation programs, particularly those that serve borrowers with sub-prime credit histories, with skepticism.
“Although many programs will meet technical requirements for income verification,” the report stated, “it is also important to demonstrate good faith in determining a borrower’s ability-to-repay. Failure to do so may not only result in poor credit performance, but increased risk of assignee liability.”
Lastly, Kroll warned that investor programs that rely on anticipated rental income and limited documentation may be riskier than fully documented investor loans for which the borrower’s income and debt profile are considered.
We believe that non-prime securitizations can achieve high investment grade ratings,” the report stated. “The analysis will, however, entail the careful consideration of product-specific risks that can impact future loan performance, and the presence of any mitigating factors.”