Mortgage Market Monitor March 2017

Monthly Commentary

Market Update

After Non-Agency RMBS spreads made significant moves tighter during the first two months of 2017, March was the first month that ended with only a marginal move tighter in spreads. This coincided with the risk-off sentiment in broader risk assets as healthcare reform challenges introduced concerns on whether the reflation trade is over. However, many of the similar themes within the sector still remained intact throughout the month –constructive market tone, robust demand from real money accounts across the capital structure and limited secondary supply. Overall, March had very light secondary bid list supply totaling only 4.8bn as the larger bid lists from the GSE’s were absent during the month. A highlight bid list from the month was a 653mm all-or-none list of mostly generic subprime bonds from a private equity firm that was unwinding an investment vehicle. The list traded with strong line item levels to a dealer that had orders from end-accounts on about half the risk. March ended with 19bn of total volume, dealers net shorter by 594mm and prices flat to half a point higher.

In new issue, Fannie Mae’s first high LTV deal of the year, 1.3bn CAS 2017-C02, priced in line with guidance – 2M1 at 115dm (3% CE/1.6 WAL), 2M2 at 365dm (1% CE/6.25 WAL) and 2B1 at 550dm (.5% CE/10 WAL).

Collateral Performance

Serious delinquencies declined across all sectors again in March. Prime decreased by 6 basis points to 6.27%; Alt-A delinquencies decreased by 10 basis point to 13.89%; Option Arm delinquencies decreased by 24 basis points to 20.59% and Subprime delinquencies decreased by 75 basis points to 25.78%. 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 declined across all sectors this month. Prime CRRs came in at 15.8%, down 91 basis points month-over-month; Alt-A CRRs were 13.1%, down 73 basis points month-over-month; Option Arm CRRs were 7.5%, down 78 basis points month-over-month and Subprime CRRs were 7.2%, down 66 basis points month-over-month. Month-over-month changes in CDRs declined across all sectors as well. Prime CDRs decreased by 22 basis points to 1.37%; Alt-A CDRs decreased by 36 basis points to 3.27%; Option Arm CDRs decreased by 26 basis points to 4.48% and Subprime CDRs decreased by 87 basis points to 4.66%.

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 4.5% 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 increased to 53% this month. Florida Subprime severities were declined to 79%. New York Subprime severities declined to 91%; and Nevada Subprime severities increased to 67%.

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