Mortgage Market Monitor January 2017

Monthly Commentary

Market Update

January was an impressive start to 2017 in Non-Agency RMBS as spreads tightened throughout the month. Almost immediately it became clear that one prominent theme was carrying over from 2016: robust demand This persisted throughout January, most likely driven by investors looking to reinvest an additional 1.1bn from the Citi settlement or a view that improving fundamentals will continue to be a tailwind for the sector. While demand was present, supply never fully normalized as January lacked any large secondary bidlists from a GSE or other legacy sellers. As a result, the few larger size bonds out for bid on a daily basis were aggressively bid by both dealers and end accounts. For color, a long locked out seasoned subprime mezz that had traded 84h in December 2016 traded with an 87h cover (2nd best bid) in mid-January. Demand from real money accounts (money managers and insurance companies) continued to be deep at the top of the capital structure in well enhanced and IG rated profiles. In longer duration and specific collateral stories, real money sponsorship continues to deepen while hedge funds continued to buy and sell selectively. The month ended with 5.4bn of supply, dealers net shorter by 214mm and prices ½ - 3 points higher depending on the profile.

In new issue, Fannie Mae and Freddie Mae both priced their first risk transfer deals of 2017. Fannie’s 1.26bn CAS 2017-C01 priced tighter than guidance - 1M1 at 130dm, 1M2 at 355dm, and 1B1 at 575dm. Freddie’s 802mm STACR 2017-DNA1 also priced tighter than guidance - M1 at 120dm, M2 at 325dm, B1 at 495dm and B2 at 1000dm.

Collateral Performance

Serious delinquencies were fairly flat across all sectors in January. Prime increased by 4 basis points to 6.60%; Alt-A delinquencies decreased by 3 basis point to 14.26%; Option Arm delinquencies decreased by 9 basis points to 21.16% and Subprime delinquencies increased by 6 basis points to 26.82%. Roll rates from current status to delinquency are holding stable near sector- level long-term averages. As voluntary prepayments continue to trend upward among Subprime and Option Arm borrowers the declining trend of serious delinquencies will likely slow.

Voluntary prepayments increased across all sectors this month. Prime CRRs came in at 19.3%, up 15 basis points month-over-month; Alt-A CRRs were 14.9%, up 25 basis points month-over-month; Option Arm CRRs were 7.8%, up 12 basis points month-over-month and Subprime CRRs were 7.3%, up 81 basis points month-over-month. Month-over-month changes in CDRs were mixed across sectors. Prime CDRs decreased by 24 basis points to 1.51%; Alt-A CDRs decreased by 1 basis point to 3.62%; Option Arm CDRs increased by 11 basis points to 5.05% and Subprime CDRs increased by 17 basis points to 5.48%.

Case-Shiller futures continue to reflect a broad recovery in home prices, predicting home prices will rise one to three percent annually during the next four years. Year-over-year, home prices are up 5.3% 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 increased to 53% this month. Florida Subprime severities decreased to 81%. New York Subprime severities increased to 87%; and Nevada Subprime severities decreased to 76%.

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