Mortgage Market Monitor February 2018

Monthly Commentary


Market Update

Even with volatility making a dramatic comeback across broader capital markets, sentiment in Non-Agency RMBS managed to remain calm and positive throughout the month. As February greeted investors with the largest one day surge in the Volatility Index (VIX), Non-Agencies maintained a steady course where spreads stayed firm and ended the month unchanged. Similar to previous episodes of heightened macro uncertainty, supply dwindled as sellers took to the sidelines. With bonds now mostly in the hands of real money accounts, holders weren’t forced to sell but rather looked for opportunities to add to their positions. In all, the amount of secondary bid lists reached close to 3.4bn, just below the previous multi-year low of 3.5bn established in April 2017. Sellers were also quiet away from bid lists with out of comp situations as overall trading volumes as reported by Trace similarly hit a multi-year low of 9.6bn. Besides the return of volatility, another contributor to the low levels of supply and trading was the annual SFIG conference, which brought together over 7,000 structured finance professionals in Las Vegas. While the Non-Agency market avoided any disturbances to balanced trade flows during the month, its resiliency should be tested if volatility becomes a more familiar fixture.

February followed up a busy January calendar for non-prime issuance with one transaction from Redwood Trust – 413mm SEMT 2018-CH1. The AAA rated super senior tranches priced right around guidance with the 4.00% coupon A1 PT at 87/n, 3.50% coupon A2 PT at 77/n, 4.00% coupon A10 FCF at 65/n, 3.50% coupon A11 FCF at 55/n, and 4.00% coupon A13 LCF at 105/n. Meanwhile, Fannie priced its first deal of the year, 1.5bn CAS 2018- C01, which featured slightly more credit enhancement for the 1M2 (1.10% vs 1.00%). The 1M1, 1M2, and 1B1 priced at 60dm, 225dm, and 355dm, respectively.

Collateral Performance

Serious delinquencies decreased across all sectors in February. Prime decreased by 7 basis point to 5.54%; Alt-A delinquencies decreased by 25 basis points to 12.38%; Option Arm delinquencies decreased by 33 basis points to 19.57% and Subprime delinquencies decreased by 65 basis points to 24.12%. Roll rates from current status to delinquency are normalizing after a recent increase likely due to hurricane and seasonal effects.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 14.2%, down 24 basis points month-over-month; Alt-A CRRs were 12.1%, up 10 basis points month-over-month; Option Arm CRRs were 8.8%, down 11 basis points month-over-month and Subprime CRRs were 6.3%, down 39 basis points month-over-month. Month-over-month changes in CDRs all increased. Prime CDRs increased by 22 basis points to 1.42%; Alt-A CDRs increased by 17 basis points to 3.28%; Option Arm CDRs increased by 86 basis points to 5.04% and Subprime CDRs increased by 111 basis points to 5.58%.

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 6.3% 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 were higher at 48% this month. Florida Subprime severities decreased to 77%. New York Subprime severities decreased to 81%; and Nevada Subprime severities increased to 77%.

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