KBRA Releases Research ? FHFA Closed-End Seconds: Effect on PLS?

BY Business Wire | AGENCY | 05/08/24 06:36 AM EDT

NEW YORK--(BUSINESS WIRE)-- The Federal Housing Finance Agency (FHFA) on April 16 issued a notice and a request for comment related to a proposal whereby Freddie Mac could purchase single-family closed-end second (CES) mortgages. This report explores the proposal?s potential overlap with the existing second lien PLS market and the effects the program may have on the size and risk profile of the PLS market post-adoption.

  • Approximately $8.7 billion have been collateralized via second lien 2.0 PLS transactions through Q1 2024, a small but growing portion of the PLS market.
  • Assuming both GSEs were active in CES purchases, nearly 60% of the CES originated and securitized in today?s PLS market might have been eligible for the GSEs? proposed program.
  • Other conditions, however, that are not explicitly stated in the proposal, may also have a bearing on KBRA?s estimate of the overlap with PLS market, include appraisal type at origination, the second lien?s documentation type, and the GSE?s pricing of this product.
  • The PLS market could end up with a larger share of CES with more negative credit attributes and is likely to become more concentrated with home equity line of credit (HELOC) products.
  • In general, PLS markets have capably absorbed the current flow of second lien securitization volumes, with spreads in line with the remainder of RMBS 2.0. Loans have also exhibited stable performance.
  • The GSEs? involvement in this sector could expand the market via the creation of efficiencies and standardization similar to those in other mortgage products currently offered by the Agencies.

Click here to view the report.

Related Publications

  • RMBS Trend Watch: Issuance Slowing; Second Liens on the Way?
  • RMBS Trend Watch: PLS Marches on, Leaving Some Buyers Behind
  • FHFA?s Credit Score Proposal and Its Impacts on RMBS

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA?s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1004227

Source: Kroll Bond Rating Agency, LLC

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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