[ad_1] The pace of deals in the private-label securities market has started to slow as the second quarter of the year gets underway and interest rates continue their upward climb — with rising inflation and the war in Ukraine, which is impacting supply chains, helping to fuel uncertainty over the future. That’s what it looks like to some of the experts behind the scenes who are responsible for rating and conducting due diligence on private label securities (PLS) offerings. With that said, the pace and volume of deals in the PLS market so far this year has still outstripped last year’s market performance over the same period. What the future holds, however, is less certain. “If you compare the first quarter of this year to last year, yes, the volume is still higher [this year],” said Sonny Weng, vice president and senior credit officer at ratings firm Moody’s Investors Service. “We also saw that on our end. So, generally that’s correct. I think the harder question is what will happen going forward.” Michael Franco, CEO of third-party due-diligence review firm SitusAMC, explained that it usually takes two to three months for loans originated in the primary market to make their way through the residential mortgage-backed securities (RMBS) pipeline. “Therefore, you would expect the loans being securitized in transactions during Q1 2022 to have been largely originated during late 2021,” he explained. But the precipitous rise in interest rates over a very short time — up 1.5 percentage points over the past three months — has made it difficult to price PLS deals in a cost-effective way for some issuers, according to Weng. The volatile rate environment affected deal volume in the first quarter of this year, even if it exceeded the mark set in 2021 over the same period. It is likely to continue to impact PLS deal count and volume in the second quarter, so long as rates continue to rise. That’s being driven, in large part, by the fact that many of the mortgages being pooled for PLS deals now were originated two to three months ago at rates lower than current market rates. “We begin to notice that because there’s just too much supply in the market, and because of inflation and the expectation that the [Federal Reserve] will increase the rates, that investors were demanding a higher coupon,” Weng said. “And obviously, when your mortgage pool has a lower [interest] rate, and you also have to cover certain fees, a higher coupon translates into a higher funding cost for the issuers. “So, we saw a couple of deals pushed [postponed] in January and February, and as time went on, more deals got pushed — and of course, the war in Ukraine didn’t help at all. Issuers either cancelled their deals or pushed the timing of the deals further down the road in hopes of better market conditions, and that will obviously have an impact on the issuance volume.” Padma Rajagopal, also a vice president and senior credit officer at Moody’s, said the slowdown in the PLS market was not predictable. She noted that it’s a byproduct of external factors such as rapidly rising inflation and interest rates, and a brutal war in Ukraine that is exacerbating inflation because of its impact on supply chains. “I think the driver of this — the decisions to cancel or move some issuance to another time — is driven a lot by the volatility with respect to [interest rate] spreads, which is happening in the market due to many reasons, including the war [in Ukraine], and also because of rate movements,” Rajagopal said. “But there were still [PLS] deals that went out after pausing because maybe they [the issuers] found an investor to buy it, and it just took them more time.” Franco added that the current rising-rate environment is likely having the greatest impact on smaller players hoping to access the PLS market. “We expect the volatility in the market to shake out some of the less-capitalized origination entities that may have been interested in issuing PLS,” he said. “…They don’t have the balance sheet to hold onto assets longer term if the securitization window isn’t open when they need it to be.” Franco said that will likely result in some smaller issuers become less active in the PLS market. “Expected [PLS] volumes were usually being predicted in the $200 billion range [in 2022] coming from prime, non-QM, reperforming/non-performing [securitizations]; CRT [credit-risk transfer transactions]; single-family rental [deals]; agency investor loans and other areas,” Franco said. “Some of those projections have come down a bit over the course of March. [However,] many players still expect overall securitization volumes in the non-agency space to be $175 billion-plus for 2022.” When rates in the housing market will stabilize is an unknown at this point, however. Weng said the market has clearly shifted to a purchase cycle as rate-and-term refinancing has declined in the face of rising rates. That, in turn, has led to an overall decline in mortgage originations, which is the collateral fuel that drives the PLS market. Non-QM player Angel Oak Mortgage Solutions caught flak from brokers when it announced last week that it would break locks and have borrowers re-lock at current rates, instituting a new 30-day rate lock policy. The company said it was forced to make rapid adjustments to ensure liquidity in a highly volatile market. “The sharp rise of the 2-year swap rate along with the rapid increase in credit spreads of the securitization market have led to an unusually fast increase in non-QM rates that the industry has not seen before,” an Angel Oak spokesperson said. “The 30-year fixed mortgage rate increased for the fourth consecutive week to 4.90% [as of the first week of April] and is now more than 1.5 percentage points higher than a year ago,” said Joel Kan, associate vice president of economic and industry forecasting for the Mortgage Bankers Association. “As higher rates reduce the incentive to refinance, [mortgage] application volume dropped
