Mortgage Market Monitor January 2018

Monthly Commentary

Market Update

The start to 2018 felt very similar to January 2017, with spreads tightening and a “January effect” playing out across RMBS asset classes. The lack of secondary supply and continued outsize demand made it clear that the persistent supply/demand technical exhibited throughout 2017 was still intact. This coupled with equity markets soaring and broader credit markets at all-time tights provided the backdrop for Non-Agency RMBS spreads to tighten throughout January. Real money demand for senior parts of the capital structure remained robust while hedge funds continued to add further down the capital structure in more levered and esoteric profiles. The single GSE list, 527mmm of 13 mixed collateral blocks, saw aggressive bidding and exhibited the broad based demand as most of the line items traded end-accounts. Daily bid list volumes were light and only totaled 4.9bn for the entire month, increasing focus on dealers’ offering sheets, who ended the month net sellers of 1.2bn. This pushed prices higher throughout January, ending with legacy RMBS prices ½ - 2 pts higher across the capital structure. Even as spreads moved further through post crisis tights, investors still viewed the legacy RMBS sector as attractive due yields quoted to loss adjusted scenarios, negative net supply and improving housing fundamentals. In settlement news, the trustees distributed 720mm of 4.5bn JPM settlement for 49 deals not included in the judicial instruction. For the 270 remaining deals included in the judicial instruction petition, deals without meaningful economic impact could receive a payout within six months, while deals with multiple interveners with opposing views could exceed 12 months.

Freddie Mac priced its first low LTV CRT transaction of the year, 900mm STACR 2018-DNA1, tighter than guidance - 1M1 (BBB-/BBB+, 3.1% CE, 1.97 WAL) at 45dm, 1M2 (B/BB-, 1% CE, 6.55 WAL) at 180dm and 1B1 (NR, .5% CE, 9.99 WAL) at 315dm.

In non-QM, Caliber priced 373mm COLT 2018-1 tighter than guidance - AAA rated A1 (34% CE/2 WAL) at 63n/2.847% yield, AA rated A2 (26% CE/2 WAL) at 68n/2.897% yield, A rated A3 (18% CE/2 WAL) at 78n/2.997% yield, BBB rated M1 (12% CE/4 WAL) at 125n/3.624% yield, and BB rated B1 (7% CE/4 WAL) at 195n/4.324% yield. Deephaven priced its first deal of the year, 305mm DRMT 2018-1, tighter than guidance - AAA rated A1 (36% CE/2 WAL) at 58n/2.887% yield, AA rated A2 (29% CE/2 WAL) at 63n/2.937% yield, A rated A3 (17% CE/2 WAL) at 80n/3.107% yield, BBB rated M1 (11% CE/4 WAL) at 140n/3.898% yield, BB rated B1 (5% CE/4 WAL) at 180n/4.298% yield, B rated B2 (1% CE/4 WAL) at 5.75% yield. Galton priced its 317mm GFMT 2018-1, with a collateral pool that's more of a hybrid between non-QM and prime jumbo, tighter than guidance - AAA rated 4% PT A22 (20% CE/3.4 WAL) at 95n/3.39% yield, AAA rated 3.5% PT A23 (20% CE/3.4 WAL) at 90n/3.34% yield, AAA rated 3.5% FCF A43 (20% CE/2.2 WAL) at 65n/2.96% yield, AAA rated 3.5% LCF A53 (20% CE/8.5 WAL) at 105n/3.71% yield..

Collateral Performance

Serious delinquencies decreased slightly across all sectors in January. Prime decreased by 6 basis point to 5.76%; Alt-A delinquencies decreased by 7 basis points to 12.73%; Option Arm delinquencies decreased by 2 basis points to 19.90% and Subprime delinquencies decreased by 3 basis points to 24.86%. Roll rates from current status to delinquency have spiked recently perhaps reflecting seasonal holiday stress and/or hurricane related delinquencies.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 14.5%, up 50 basis points month-over-month; Alt-A CRRs were 12.1%, down 106 basis points month-over-month; Option Arm CRRs were 8.9%, down 5 basis points month-over-month and Subprime CRRs were 6.3%, down 318 basis points month-over-month. Month-over-month changes in CDRs all decreased. Prime CDRs decreased by 14 basis points to 1.17%; Alt-A CDRs decreased by 32 basis points to 3.07%; Option Arm CDRs decreased by 59 basis points to 4.15% and Subprime CDRs decreased by 49 basis points to 5.03%.

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 lower at 42% this month. Florida Subprime severities increased to 76%. New York Subprime severities increased to 91%; and Nevada Subprime severities decreased to 54%.

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