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Securitization in Focus — August 2024


Asset-backed Securities

Issuance in the ABS market shows no signs of slowing, with nearly $225 billion year-to-date in 2024.

ABS Issuance ($B)

ABS Issuance

Consumer Performance Update

As we approach year-end, defaults and delinquencies are expected to increase marginally across consumer ABS, reflecting historic seasonality. Bifurcation continues with subprime faring worse than near prime or prime.

 

Auto ABS

Overall delinquencies rose in August. Prime auto was mixed with a decrease in defaults (-0.05%) and an increase in delinquencies (+0.03%). Subprime continues to weaken (delinquencies up 0.29% month-over-month and up 0.30% year-over year).

 

Consumer Loan

Delinquencies in the consumer loan market rose month-over-month with fewer defaults in August. Year-over-year performance was mixed as marketplace lending (online platforms) improved (down 0.41% to 2.11%) while brick and mortar saw delinquencies and defaults increase (up 0.72% to 3.92% and up 0.80% to 9.04%, respectively).

 

Credit Card

Credit card delinquencies were up 0.01% month-over-month and up 0.15% year-over-year, while charge-offs decline 0.06% month-over-month.

Commercial Mortgage-backed Securities

CMBS Issuance ($B)

CMBS Issuance

CMBS private label issuance continues to surge, pushing past $69 billion and exceeding full-year 2023 issuance ($46 billion).

Delinquency Rates (%)

The Trepp CMBS delinquency rate climbed again in August 2024, increasing one basis point to 5.44%. The usual culprit — the office sector — was not the reason for the increase. The office delinquency rate actually dropped from 8.09% to 7.97%, while multifamily increased from 2.63% to 3.30%, the highest level for the sector in more than three years.

CMBS Deliqnuencies

Commercial Real Estate Quick Hits

  • Property valuations could be reaching a turning point, as the RCA CPPI US National All-Property Index rose 0.3% in July, the third consecutive monthly gain.
  • The RCA CPPI US National All-Property Index is down just 1.0% over the past year, nearly unchanged from the July 2021 reading but still higher by 15.5% over the past five years. The office sector is the only major category where valuations are below pre-pandemic levels, with suburban and central business district prices down 2.5% and 48.7%, respectively, since July 2019.
  • Restrictive lending standards continue to dampen commercial real estate loan demand. The Federal Reserve's Senior Loan Officer Opinion Survey showed that over 20% net share of banks tightened standards for nonfarm nonresidential, multifamily and construction loans in Q2. This measure continues to decrease and is now at the lowest level since 2022.
  • Consumer bifurcation has hit the hotel market. Increased room demand at luxury and upscale hotels coincides with declines at economy hotels. This difference echoes broader spending data that show the average consumer is prioritizing non-discretionary outlays amid a slowing labor market.

Residential Mortgage-backed Securities

Total RMBS issuance year-to-date through August 2024 ($88 billion) has surpassed 2023’s issuance for the same period ($79 billion), representing an 11% increase. Non-qualified mortgages represent the majority of this year’s issuance even though the sector has seen a 10% decrease from 2023.

RMBS Issuance ($B)

RMBS Issuance

Definitions

Credit Risk Transfer (CRT)
Credit risk transfers are a form of synthetic securitization. With Government Sponsored Entities (Fannie Mae, Freddie Mac) CRTs, investors are not funding mortgages directly (that occurs via the pass-through certificates from Freddie Mac and Fannie Mae). Instead, CRT investors are participating alongside Freddie Mac and Fannie Mae through securitization of a portion of the mortgage credit risk retained by the GSEs.

Jumbo Loan
A type of home mortgage that exceeds the lending limits set by the Federal Housing Finance Agency (FHFA) for conventional mortgages. A jumbo loan is not eligible to be purchased, guaranteed or securitized by GSEs.

Non-Qualified Mortgage (Non-QM)
A non-qualified mortgage is a mortgage taken out by borrowers with the funds to buy a home but cannot meet the typical mortgage eligibility requirements — for example, a self-employed worker with irregular income, such as acontractor.

Nonperforming Loan/Reperforming Loan (NPL/RPL)
Nonperforming loans are those in default. Often, they can be bought at a considerable discount and benefit from any potential workout or recovery.

Reperforming loans were once delinquent for at least 90 days and are now performing again. With an RPL, typically, a borrower has filed for bankruptcy and has continued to make payments because of the bankruptcy agreement. Such an agreement generally allows the borrower to become current on their debt via a loan modification program.

Single Family Rental (SFR)
Single-family rental securitizations (SFR) are a hybrid of CMBS-like deal structures with MBS-type collateral. Large operators tend to finance portfolios of homes through single-borrower securitizations, where they are the sole sponsor of the underlying loan(s). These deals most closely resemble single-asset, single-borrower CMBS. Smaller players have their loans combined in multi-borrower deals, which require enhanced credit analysis as multiple sponsors and a broader range of collateral can heighten risks.

Residential Transition Loan (RTL)
Residential transition loans help borrowers finance short-term rehabilitation and construction projects. The borrower aims to sell or find long-term financing as a rental property eventually. The first securitization occurred in 2018, so it is a relatively new asset class within ABS. Issuance increased post-COVID amidst low rates and a housing supply shortage. They are also called Short Term Residential Investor loans, Fix-and-Flip loans and Residential Bridge loans.

Home Equity Line of Credit (HELOC)
A home equity line of credit is a revolving line of credit secured by equity built up in a home that offers credit at a lower rate than credit cards or consumer unsecured loans.

Sources: Deustche Bank, Trepp, Wells Fargo, Barclays.

Investment Grade is a Bond Quality Rating of AAA, AA, A or BBB.

The RCA CPPI (commercial property price indexes) are transaction-based indexes and accurately measure commercial real estate price movements using repeat-sales regression methodology.

The views expressed are those of Diamond Hill as of September 2024 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.

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