Mortgage Market Monitor February 2017

Monthly Commentary

Market Update

The strong start to 2017 carried over to February as Non-Agency RMBS continued to rally with spreads reaching multi-year tights across the capital structure. Also similar to January, the technical backdrop of growing demand chasing limited supply not only remained but came into particular focus as a couple of events kept many market participants away and further dampened supply and trading activity. For several days during the first half of the month, fierce winter storms struck the Northeast and led some accounts to either postpone or cancel their sales plans altogether. Then towards the end of February, investors across structured finance gathered in Las Vegas to attend the annual SFIG conference. In all, Trace reported 15.6bn in trading volume, down from 16.8bn a month earlier. Monthly bid list volume totaled 4.9bn, which was 10% lower than January’s level. While smaller sized line items filled most of the secondary calendar (80% had less than 5mm current face), one bid list containing a single bond from a GSE seller drew special attention as it contributed 20% to the latter’s amount. The 960mm list containing the entire tranche of a well enhanced, below investment grade senior cash flow backed by subprime collateral was bought by a dealer and quickly placed into six different accounts by the end of the day. As the legacy Non-Agency market continues to shrink from a combination of amortization, prepayment, and liquidation, large block sized bonds should continue to garner significant amount of attention and have an outsized impact on supply and pricing.

Activity in the primary market picked up for the non-prime space as the first transaction of the year from a first time issuer priced in the middle of February. Invictus Capital Partners’ inaugural deal, 137mm VERUS 2017-1, was rated by S&P, Kroll, and Morningstar. The senior A1 tranche received the highest AAA rating, becoming the second non-prime deal to do so. In credit risk transfer, Freddie Mac issued its second securitization of the year. 753mm STACR 2017-HQA1 priced right around guidance except for the B2 tranche, which came wider than the initial 1,100a talk – M1 at 120dm, M2 at 355dm, B1 at 500dm, and B2 at 1,275dm.

Collateral Performance

Serious delinquencies declined across all sectors in February. Prime decreased by 4 basis points to 6.42%; Alt-A delinquencies decreased by 11 basis point to 14.06%; Option Arm delinquencies decreased by 33 basis points to 20.83% and Subprime delinquencies decreased by 34 basis points to 26.48%. 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 were mixed across sectors this month. Prime CRRs came in at 16.8%, down 236 basis points month-over-month; Alt-A CRRs were 13.8%, down 105 basis points month-over-month; Option Arm CRRs were 8.4%, up 53 basis points month-over-month and Subprime CRRs were 7.9%, up 57 basis points month-over-month. Month-over-month changes in CDRs were mixed across sectors. Prime CDRs decreased by 7basis points to 1.53%; Alt-A CDRs decreased by 10 basis points to 3.59%; Option Arm CDRs decreased by 33 basis points to 4.72% and Subprime CDRs decreased by 13 basis points to 5.47%.

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 5.6% 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 decreased to 48% this month. Florida Subprime severities were flat at 80%. New York Subprime severities increased to 93%; and Nevada Subprime severities decreased to 64%.

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