Mortgage Market Monitor December 2018

Monthly Commentary

Market Update

Since the start of the fourth quarter, Non-Agency RMBS followed a similar path as other risk assets and struggled with weak sentiment and macro uncertainty. However, as broader markets continued to swing wildly through the course of December over an array of concerns that included mounting US and China trade tensions, domestic political gridlock, and slowing global economic growth, Non-Agency broke away and remained relatively steady. Spreads closed the month mostly unchanged on balanced flows, though they still sat wider by approximately 20 to 40 bps (profile dependent) from post-crisis tights reached earlier in the year. As expected, trading activity thinned heading into the holiday season and finished with 3.4bn total bid list supply compared with 6.3bn in the previous month. Trace volume also dropped month-over-month from 11.3bn to 8.5bn where dealers continued to be net sellers and were lighter by another 398mm.

The primary market was also quiet heading into year-end, though one last non-QM transaction managed to price near the middle of December to cap off a year in which the non-QM/expanded prime sector established new highs in issuance. Neuberger Berman issued its second overall and second deal of the year, 320mm HOF 2018-2. The AAA rated super senior A1 priced at 105/n, which was 28 bps wider than where corresponding A1 tranche from HOF 2018-1 priced at the end of July. Altogether, non-QM/expanded prime securitization amounted to 12bn, triple the total of 4bn from 2017.

Collateral Performance

Serious delinquencies were fairly flat across all sectors in November. Prime decreased by 2 basis point to 3.81%; Alt-A delinquencies decreased by 4 basis points to 9.59%; Option Arm delinquencies decreased by 2 basis points to 17.00% and Subprime delinquencies increased by 1 basis points to 20.28%.

In Puerto Rico, serious delinquencies spiked after hurricane Maria to 27.6% in Prime mortgages, 47.2% in Alt-A mortgages, and 58.8% in Subprime mortgages. These delinquency percentages have been on a declining trend since the beginning of 2018. Prime delinquencies declined 77 bp to 13.83%, Alt-A delinquencies declined 78 basis points to 30.24% and Subprime delinquencies decreased 31 bps to 36.81%.

Voluntary prepayments declined across all sectors this month. Prime CRRs came in at 10.7%, down 165 basis points month-over-month; Alt-A CRRs were 10.6%, down 210 basis points month-over-month; Option Arm CRRs were 8.5%, down 149 basis points month-over-month and Subprime CRRs were 6.0%, down 139 basis points month-over-month. Month-over-month CDRs also declined across all sectors. Prime CDRs decreased by 18 basis points to 0.77%; Alt-A CDRs decreased by 69 basis points to 2.31%; Option Arm CDRs decreased by 149 basis points to 3.94%, and Subprime CDRs decreased by 140 basis points to 3.94%.

Case-Shiller futures now indicate a flat growth environment in residential home prices, predicting home prices will rise 0.2% annually during the next four years. Year-over-year, home prices are up 5.0% across Case-Shiller’s 20 major city index. At the national level, changes in severities increased across all sectors. At the state level, California Subprime severities were higher at 54% this month. Florida Subprime severities increased to 95%. New York Subprime severities increased to 94%; and Nevada Subprime severities decreased to 74%.

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