Mortgage Market Monitor March 2016

Monthly Commentary

Market Update

What a difference a month can make. The heightened volatility in the credit markets in January and February, which saw violent moves lower and some “gapping” price action in risk assets, finally subsided in March. Some macro stability – oil recovering, European Central Bank QE, a dovish FOMC – improved the landscape and allowed risk assets to finally find their footing, setting up a month for assets to retrace the spread widening from earlier in the year. In Non-Agencies, March started off with almost non-existent flows with most participants attending the annual SFIG conference. The sentiment at the conference was mixed for the sector, with participants lacking conviction for a price move in either direction. Liquidity and the postponement of the CWL settlement distribution were the biggest concerns, but at the same time most were in agreement that housing fundamentals continue to be strong. As investors returned back to their seats from the conference and with the credit markets rallying, the overall market tone gradually improved and the sector started to find support at current levels. Bid list volumes continued to be light throughout the month, totaling only 5.9bn, from a combination of the ABS West conference, March Madness and sellers turning to other trading methods besides a bid list process that had felt very broken in February. Two lists highlighted March: 197mm of eight seasoned Manufactured Housing bonds and the second, 501mm of nine IG rated Re-Remics. The MH list traded extremely well on a line item basis and although not a requirement, the Re-Remics traded on an all-or-none basis to one account. Similar to how non-agency lagged risk assets lower in January and February, once again exhibiting stability in volatile times and a lower beta to the broader credit markets, the sector trailed behind other risk assets as they rallied back in March. Prices across the sector ended the month ½ pt. higher in up in quality profiles and 2-3 pts. higher in levered/higher beta names.

In risk sharing, Freddie Mac priced its second risk transfer deal of the year - 475mm STACR 2016-HQA1 with M1 at 175dm, M2 275dm, M3 635dm, and B 1275dm. Spreads for the new deal tightened across the capital structure and ended the month at 160dm, 170dm, 575dm, for M1, M2, and M3, respectively. Fannie Mae also issued their second transaction of the year, 1bn CAS 2016-CO2, which priced in line with guidance - 1M1 at 215dm, 1M2 at 600dm and 1B at 1,225dm.

Collateral Performance

Serious delinquencies declined across all sectors in March. Prime delinquencies decreased by 2 basis points to 6.77%; Alt-A delinquencies decreased by 19 basis points to 15.55%; Option Arm delinquencies decreased by 39 basis points to 23.46% and Subprime delinquencies decreased by 84 basis points to 29.32%. Roll rates from current status to delinquency are holding stable near sector- level long-term averages.

Voluntary prepayments increased across all sectors this month. Prime CRRs came in at 13.5%, up 118 basis points month-over-month; Alt-A CRRs were 10.4%, up 64 basis points month-over-month; Option Arm CRRs were 4.9%, up 32 basis points month-over-month and Subprime CRRs were 5.5%, up 133 basis points month-over-month. Month-over-month changes in CDRs were mixed. Prime CDRs increased by 2 basis points to 1.43%; Alt-A CDRs decreased by 1 basis point to 3.61%; Option Arm CDRs increased by 20 basis points to 4.82% and Subprime CDRs decreased by 2 basis points to 5.12%.

Case-Shiller futures continue to reflect a broad recovery in home prices, predicting home prices will rise three percent annually during the next four to five years. Year-over-year, home prices are up 4.3% across Case-Shiller’s 20 major city index. At the national level, changes in severities were mixed again with Subprime severities reaching an all-time high of 79.5%. At the state level, California Subprime severities increased to 54% this month. Florida Subprime severities increased to 90%. New York Subprime severities increased to 95%; and Nevada Subprime severities decreased to 69%.

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