Is the 2022 Out-look for PLS MBS Gasping for Air?

According to a recent publication today by the Structured Finance Association Research Center the MBS PLS market was on fire this year and is on track to exceed $200B in insurance, (not a bad for the year but it has been a steep glacial climb since it cratered in 2012)

The reset of the non-agency market over the past few years has been developed by more sound origination practices, adherence to prudential underwriting standards, and ultimately the servicing performance of the collateral, (even during the 20+ month pandemic). Additionally, the PLS market has benefitted from perhaps the strongest HPA in history, consumer demand from the pandemic, and most of all a deliberate policy change by the FHFA at the beginning of the year.

Of course, the mortgage gods give and take away. With the change from one administration to the next and the stroke of a pen, the FHFA not only reversed itself on the 7% de-minimus rule (that was the catalyst for alternative liquidity), it recently increased conforming loan limits on most SFR to $647,200 which by most standards is a "jumbo" loan but to add further challenges to the PLS market it increased "high-cost area limits" or what we refer to as "agency high balance" by an astounding 150%. Yes, the new eligible single unit conforming loan limit is a whopping $970,800 from $647,200. (Yikes, for those of us that have lived through irrational exuberance, this sends a chilling shiver down my default and delinquency spine)

When you think about the 2021 success with tremendous tailwinds and then factor in the about-face for 2022 and the strong headwinds it is difficult to assess how the PLS market will respond for next year. If you have to peel back at least 50% of the agency eligible investor/second home prime loans (and I think that may be light) and then try to over-lay the conforming new high-balance levels it is not unreasonable to consider a 5% issuance drop on the low side and as much as a 25% adjustment on the high side. Clearly, the PLS market will make adjustments and may find a few new niches along the 2022 path but if the issuance correction is at the higher end it will be a lack-luster year.

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