Mortgage Market Monitor December 2017

Monthly Commentary

Market Update

As expected with the holiday season in full swing, December closed the year on a quiet note as secondary trading activity and supply were both muted. Aggregate monthly bid list volume declined 43% to 4.1bn from 7.2bn in November. Meanwhile, Trace reported a month-over-month drop of 6.5bn in trading to 10.3bn in December. However, there were a few sizeable lists that caught the attention of investors and kept them busy, including a 212mm list from a GSE seller that cleared at strong levels into end accounts. A separate legacy holder was also active in putting out for bid and selling 10.7bn in derivatives in the middle of the month. A week later the same holder sold 682mm of P&I bonds along with another 141mm in derivatives. A straightforward comparison of 2016’s total bid list volume of 70.9bn and 2017’s 70.0bn shows that investor selling maintained a steady pace. Though if viewed as a percentage of the outstanding size of the Non-Agency universe, the bid list calendar in 2017 was quite robust at 14% (70.0bn volume/498.6bn Non-Agency outstanding according to Loan Performance), where most of the supply ended in the hands of real money accounts. In 2016, that number was 13% (70.9bn volume/564.2bn Non-Agency outstanding according to Loan Performance). Despite the slowdown heading into year-end, spreads remained firm and wrapped up a solid year in which the credit curve flattened significantly. Following the path of risk assets in general but firmly rooted in positive fundamental and technical dynamics, the rally that occurred through much of the year pushed spreads well within post crisis tights for all collateral types and all parts of the capital structure.

The effects of Hurricane Harvey and Irma were still evident in December’s remittance reports. While delinquency rates in hurricane affected areas remained elevated for both legacy and credit risk transfer deals, the transition rates from current to 30 day delinquent did drop from their peaks. More importantly, market expectations for losses continued to be contained. In JP Morgan settlement news, trustees filed a petition seeking judicial instruction regarding the appropriate cash flow waterfall. As a result, there are 270 deals covered under the petition that will have their payout dates delayed. For the remaining 49 deals that are not covered, payment is expected reach bondholders in the first quarter of 2018.

In the primary market, Freddie Mac issued its inaugural STACR deal backed by HARP collateral – 200mm STACR 2017-HRP1. Unlike with previous STACR transactions, Freddie Mac didn’t make available the IG rated notes to investors. The M2 and B1 priced tighter than guidance at 245dm and 460dm, respectively. While there weren’t any non-prime deals issued in December, the sector continues to grow in size and importance. Total issuance for 2017 topped 3.9bn from 16 deals, a significant step forward from 990mm and 6 deals in 2016.

Collateral Performance

Serious delinquencies increased slightly across all sectors in December. Prime increased by 16 basis point to 5.91%; Alt-A delinquencies increased by 24 basis points to 12.96%; Option Arm delinquencies increased by 17 basis points to 19.93% and Subprime delinquencies increased by 37 basis points to 25.41%. Roll rates from current status to delinquency have recently become elevated. We are watching this rise to see if it is a seasonal effect or due to a longer-lasting trend.

Voluntary prepayments decreased across all sectors this month. Prime CRRs came in at 14.0%, down 283 basis points month-over-month; Alt-A CRRs were 13.2%, down 177 basis points month-over-month; Option Arm CRRs were 8.9%, down 32 basis points month-over-month and Subprime CRRs were 9.5%, down 453 basis points month-over-month. Month-over-month changes in CDRs were mixed. Prime CDRs decreased by 25 basis points to 1.30%; Alt-A CDRs decreased by 2 basis points to 3.40%; Option Arm CDRs increased by 32 basis points to 4.74% and Subprime CDRs decreased by 13 basis points to 5.54%.

Case-Shiller futures indicate a continuation of slow gains in residential home prices, predicting home prices will rise two to three percent annually during the next three years. Year-over-year, home prices are up 6.4% across Case-Shiller’s 20 major city index. At the national level, changes in severities were mixed across all sectors. At the state level, California Subprime severities were higher at 48% this month. Florida Subprime severities decreased to 69%. New York Subprime severities were flat at 85%; and Nevada Subprime severities increased to 68%.

Hurricane Maria’s Impact on Puerto Rico’s Delinquencies

On September 20, 2017 Maria hit Puerto Rico. Some estimates categorize Maria as the worst natural disaster on record for Puerto Rico. While exposure to Puerto Rico represents only 26 basis points of the overall non-agency RMBS universe, the rise in delinquencies as a result of this disaster is something TCW is tracking. We anticipate delinquency rates to rise higher over the coming months, and we will analyze the losses as the delinquencies move through the liquidation process.

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This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. The information contained herein may include preliminary information and/or "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any forward-looking statements or opinions in this document. Any opinions expressed herein are current only as of the time made and are subject to change without notice. Past performance is no guarantee of future results. © 2019 TCW