Mortgage Market Monitor March 2018

Monthly Commentary

Market Update

After two consecutive months of Non-Agency RMBS spreads moving tighter, March was the first month of 2018 that ended with spreads unchanged for the sector. Although there were periods during the month with macro volatility that led to weakness in stocks and other securitized products, the legacy RMBS market was once again resilient as the market sentiment remained firm. While spreads were unchanged, March’s performance can still be characterized as one of outperformance. Despite the annual SFIG conference in early March, multiple storms hitting the East Coast and heightened volatility, trading volumes increased to 13.2bn from February’s 9.6bn. Daily bid list selling also increased to 4.73bn and dealers ended March as net sellers by only 33mm. The biggest list of March was the single list from a GSE, 487mm/7 line items off mostly subprime gone pro-rata passthroughs. The list was aggressively bid by dealers and real money. All seven blocks traded into end-accounts highlighting the continued robust demand for legacy RMBS paper. The main demand themes remain intact – real money focused on senior and well enhanced profiles, while hedge funds continue to add further out the credit curve in higher beta and off-the-run names. Despite spreads being well through post-crisis tights, investors still maintain a constructive view on the sector due to the negative net supply, loss adjusted yields and improving housing fundamentals. In March, 17 legacy RMBS deals with 675mm of collateral were called. The deals consisted of mostly Ocwen/Nationstar serviced Alt-A and prime fixed rate loans. In JPM settlement news, 91 deals were separated from the trust instruction proceedings and are expected to receive a 625mm settlement payout in April or May remits.

CRT traded alongside the broader macro markets as spreads moved wider and the credit curve continued to steepen. On-the-run M1’s ended +10 bps, M2’s +20 bps and B1’s +40 bps. Fannie priced it's 1bn CAS 2018-C02 transaction referencing high LTV collateral at 65dm, 220dm, and 400dm for the 2M1, 2M2, and 2B1, respectively. Freddie Mac also priced a high LTV deal, 985mm STACR 2018-HQA1, which priced at the wider end of guidance at 70dm, 230dm, and 435dm on the M1, M2, and B1, respectively.

Collateral Performance

Changes in Non-Agency serious delinquencies were mixed in February. Prime increased by 3 basis point to 5.54%; Alt-A delinquencies decreased by 8 basis points to 12.29%; Option Arm delinquencies decreased by 11 basis points to 19.46% and Subprime delinquencies decreased by 42 basis points to 23.69%. Roll rates from current status to delinquency are normalizing after a recent increase likely due to hurricane and seasonal effects.

Changes in Non-Agency voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 11.4%, down 278 basis points monthover- month; Alt-A CRRs were 11.3%, down 75 basis points month-over-month; Option Arm CRRs were 8.4%, down 35 basis points month-overmonth and Subprime CRRs were 10.8%, up 462 basis points month-over-month. Month-over-month changes in CDRs all decreased. Prime CDRs decreased by 28 basis points to 1.18%; Alt-A CDRs decreased by 49 basis points to 2.82%; Option Arm CDRs decreased by 74 basis points to 4.33% and Subprime CDRs decreased by 107 basis points to 4.53%.

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 higher at 50% this month. Florida Subprime severities decreased to 75%. New York Subprime severities decreased to 79%; and Nevada Subprime severities increased to 82%.

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