Mortgage Market Monitor December 2016

Monthly Commentary

Market Update

After an eventful November that was highlighted by the U.S. presidential election and its far reaching impact on the broader markets, the Non-Agency MBS sector remained on a steady course of grinding tighter in December and finished the year with the familiar narrative of a constructive market tone based on improving fundamentals and positive pressures from declining supply. While the holiday season had a role in secondary bid list volume totaling just 4.8bn, which was the second lowest monthly amount for 2016, the drop off from previous month’s 5.7bn was not as dramatic as years past. In fact, bid list levels were consistently muted throughout the year. The aggregate for all of 2016 was 71bn, almost 39% less than that for 2015. However, a source of meaningful supply has been the GSEs. And while they were quiet in November, they did put out one bid list before year end. It was a 472mm list consisting mostly of subprime collateral where majority of bonds were retained by the seller. Weak bids weren’t to blame but rather high reserves that weren’t met. For bonds that did trade during the month and where color was available, prices managed to hold firm despite elevated rates. Even profiles with longer duration, including locked out mezzanine and fixed coupon bonds, continued to see strong retail support. An additional tailwind for Non-Agency MBS appeared towards the end of the month in the form of improved NAIC prices for most parts of the sector, lending support to sustained demand from insurance companies.

Investors continued to see settlement payments come through as the remainder of the Citigroup settlement was paid out in December. In addition, three out of the 18 Countrywide deals with disputed cash flow waterfalls also received payment because there was a lack of objections from the opposing group. In the primary market, Caliber issued its third securitization of the year – 226mm COLT 2016-3. The deal featured for the first time a super senior tranche that’s backed by non-prime loans and rated AAA by Fitch and DBRS. Altogether, non-prime issuance summed to 1bn in 2016, a bump from 370mm in the previous year and a significant step in the right direction. Meanwhile, Fannie Mae’s final deal of the year, 702mm CAS 2016-C07, priced at the tighter end of guidance – 2M1 at 130dm, 2M2 at 435dm, and 2B at 950dm.

Collateral Performance

Serious delinquencies increased across all sectors but Option Arm in October. Prime increased by 6 basis points to 6.56%; Alt-A delinquencies increased by 2 basis point to 14.31%; Option Arm delinquencies decreased by 14 basis points to 21.24% and Subprime delinquencies increased by 14 basis points to 26.78%. Roll rates from current status to delinquency are holding stable near sector- level long-term averages.

Voluntary prepayments declined across all sectors except for Prime this month. Prime CRRs came in at 19.2%, up 48 basis points month-over-month; Alt-A CRRs were 14.7%, down 87 basis points month-over-month; Option Arm CRRs were 7.8%, down 138 basis points month-over-month and Subprime CRRs were 6.5%, down 282 basis points month-over-month. Month-over-month changes in CDRs were also mixed across sectors. Prime CDRs increased by 29 basis points to 1.7%; Alt-A CDRs increased by 10 basis points to 3.57%; Option Arm CDRs decreased by 44 basis points to 4.86% and Subprime CDRs increased by 20 basis points to 5.08%.

Case-Shiller futures continue to reflect a broad recovery in home prices, predicting home prices will rise two to three percent annually during the next four years. Year-over-year, home prices are up 5.1% across Case-Shiller’s 20 major city index. At the national level, severities increased across all sectors. At the state level, California Subprime severities were flat at 52% this month. Florida Subprime severities increased to 88%. New York Subprime severities decreased to 90%; and Nevada Subprime severities increased to 86%.


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