U.S. RMBS 2024 Outlook: More Issuance Possible, but Risks Still Lurk

The U.S. residential mortgage-backed securities (RMBS) market, in tandem with the mortgage and housing landscape, enters 2024 on a slightly more positive note than the solemn tone from a year ago. It looked like H2 2022's dramatic downtrend in loan production and issuance was going to continue because of higher rates and volatility. However, as the year progressed, RMBS issuance seemed to settle into some semblance of a rhythm as monthly securitization volumes were steadier throughout 2023 versus 2022, albeit at a 50% lower annual pace. In the midst of slowing home sales, mortgage originations, and U.S. RMBS volumes industrywide, non-Qualified Mortgage proved to be a little more resilient, only down about 30% compared with 2022, while other emerging RMBS subsectors such as home equity-related securitizations provided an incremental offset to an otherwise lower supply environment in 2023.

Meanwhile, on the fundamental side, credit performance stayed resilient and contained as delinquencies (DQs) and credit losses held well within expected ranges, largely thanks to unemployment and housing prices staying supportive. Home prices have actually continued to rise in a number of areas despite home sales being even more muted than last year. With the 30-year mortgage rate most recently at 6.61%—another 19 basis points (bps) higher year to date on top of the 300-bp hike in 2022—prepayment speeds continued to persist in the mid- to low-single digits, effectively at historically low baseline turnover speeds. DQs and losses stayed relatively low throughout the year, but some RMBS sectors did see some mild upticks. At this point in the current cycle, although credit performance has been very good, mortgage credit risk is less balanced now as DQs have moved off of historically low levels and especially given the inflationary conditions still facing consumers.

For 2024, we anticipate mortgage lending volumes will be similar to or slightly higher than 2023’s levels overall, with some mild differences across individual RMBS segments as consumers and industry participants acclimate to a 6% to 7% mortgage rate landscape. We believe RMBS deal performance in general will remain contained and within projected levels, absent a significant recession, which would put added pressure on DQs and defaults.