Mortgage Market Monitor April 2017

Monthly Commentary

Market Update

Following a month in which Non-Agency spreads experienced a slowdown in tightening for the first time in 2017, April faced several challenges that had the potential to extend that trend or reverse the direction altogether. From global uncertainties including the first round of presidential elections in France and conflict with North Korea to domestic questions on fiscal policies and tax reforms, Non-Agency RMBS investors’ support was tested throughout the month but ultimately remained firm. Spreads continued on a tightening path and actually picked up pace after the results of the French elections came in line with expectations. Even as spreads continued to surpass post crisis tights, it was not enough to induce holders to sell in meaningful numbers as the desire to be invested in the sector given positive fundamental and technical outlooks overpowered the need to capture gains. Compounded by the absence of bid lists from the GSEs, secondary supply totaled just 3.5bn for the month, which was below the previous multi-year low of 3.7bn in June 2016. Overall trading volumes were also muted with Trace reporting 13bn, down 33% from March.

In news away from trading, the New York State Supreme Court published at the beginning of the month its ruling on the remaining 15 disputed Countrywide deals. For 14 of them, the judge held to the language in the governing documents in which a higher percentage of settlement will be allocated to senior mezzanine tranches at the expense of seniors. However, holders of senior bonds may still appeal the ruling, in which case the payout date will once again be delayed. For the one remaining deal, the court ruled that the settlement payment be treated in a way that retains benefit to the senior bondholders. In addition to settlement news, regulatory actions and a lawsuit against a servicer made headlines towards the end of the month. Ocwen, which services approximately 52bn of Non-Agency loans, was given cease and desist orders from more than 20 state regulators that prevent it from acquiring new servicing rights and originating new mortgages in those states. The orders were based on alleged mishandling of escrow accounts. Separately, the Consumer Financial Protection Bureau and Florida Attorney General filed a lawsuit against Ocwen for several allegations of improper servicing practices. While there hasn’t been a noticeable impact on bond valuations, the longer term implications of potential servicing transfers and on bond cash flows are still unknown.

The primary calendar was active in April with two non-prime deals and one credit risk transfer deal. Deephaven issued its first rated and second overall non-prime transaction, 213mm DRMT 2017-1A. The super senior A1 tranche received AAA rating from S&P and priced tighter than guidance at IS+95. Meanwhile, Caliber’s sixth securitization and first of the year, COLT 2017-1, was also the largest non-prime issuance since the crisis with 403mm collateral balance and 377mm offered certificates. Four rating agencies gave the super senior A1 tranche AAA rating, which also priced at IS+95. The non-prime sector continues to grow as year-to-date issuance of 1.2+bn has already surpassed the total for all of last year. In credit risk transfer, Freddie Mac priced its third deal of the year, 1.3bn STACR 2017-DNA2, into strong demand where the B1 tranche was upsized from 115mm to 215mm - M1 at 120dm, M2 at 345dm, B1 at 515dm, and B2 at 1,125dm.

Collateral Performance

Serious delinquencies declined across all sectors again in April. Prime decreased by 7 basis points to 6.19%; Alt-A delinquencies decreased by 33 basis point to 13.53%; Option Arm delinquencies decreased by 47 basis points to 20.11% and Subprime delinquencies decreased by 78 basis points to 24.97%. Roll rates from current status to delinquency are declining in a sign of borrower strength.

Voluntary prepayments increased across all sectors this month. Prime CRRs came in at 15.8%, up 2 basis points month-over-month; Alt-A CRRs were 14.1%, up 118 basis points month-over-month; Option Arm CRRs were 9.0%, up 146 basis points month-over-month and Subprime CRRs were 7.4%, up 35 basis points month-over-month. Month-over-month changes in CDRs increased across all sectors as well. Prime CDRs increased by 2 basis points to 1.46%; Alt-A CDRs increased by 88 basis points to 4.20%; Option Arm CDRs increased by 60 basis points to 5.11% and Subprime CDRs increased by 186 basis points to 6.59%.

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 3.7% 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 47% this month. Florida Subprime severities decreased to 75%. New York Subprime severities declined to 81%; and Nevada Subprime severities were flat at 69%.

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