Mortgage Market Monitor April 2016

Monthly Commentary


Market Update

In a lot of ways, the Non-Agency RMBS market in April looked very similar to what it did in the previous month, which is to say almost opposite from the first two months of the year, as several trends that started in March were still going strong – improving investor sponsorship and tightening spreads amidst a stable global macro backdrop and declining bid list volumes. After the first quarter came to a quiet close, the first full week of April saw a slight upturn in activity. Weekly supply reached 1.2bn and featured the only list from a GSE seller for the month, which consisted of six FHA/VA and MH bonds totaling 231mm and had all but one traded. Over the course of the remaining three weeks, secondary supply stayed consistent and averaged 1.3bn to bring monthly total to 5.2bn, which is 11% lower than what it was in March and more than 50% lower than in April of last year. However, the amount of current face traded as reported by TRACE was significantly higher month-over-month (30bn in April versus 22bn in March), most likely the result of continued focus on and better execution from out of comp situations. Even as bid list volumes remained muted, the tone prevailing in the non-agency market continuously improved during the month. Money managers and insurance companies provided a sustained source of support while interest reemerged from levered investors such as hedge funds. Similar to positive price movements in other risk assets and helped by greater depth of bids, non-agency spreads continued to tighten from the wides seen in February. Bonds further down the capital structure and longer in duration also joined in the rally as investors searched for ways to enhance yield in a low rate environment. While still very dependent on individual names, prices in general rose two to four points in April.

April was also a positive month for settlement news as part of the 8.5bn Countrywide payment took a step closer to becoming reality. The case was originally delayed in February because the trustee sought clarification on the distribution waterfall. On March 31, investors submitted a proposed order with the NY State Court that sought release of payment for 515 out of the 530 deals in which the trustee would follow the payout methodology specified in the Settlement Agreement. BNY Mellon as trustee subsequently submitted a counter proposal on April 28 for the payout on 512 deals. The remaining 18 deals would continue in the normal court process. A hearing on the proposed judgment was scheduled for May, and if the judge signs the final court order it is possible that bondholders will finally receive the settlement payout as early as June.

Fannie Mae issued the only risk sharing transaction of the month. The 1.17bn CAS 2016-C03 deal included both lower and higher LTV groups, unlike Fannie’s previous deal in March which only included a lower LTV group. The tranches priced right around guidance at 200dm, 530dm, 1175dm for the 1M1, 1M2, 1B, respectively, and 220dm, 590dm, 1275dm for the 2M1, 2M2, 2B, respectively. Another notable event in risk sharing was the upgrade of STACR 2015-DN1 M3 by Moody’s from Ba1 to Baa1. This was the first last-cash-flow bond in the sector to receive an upgrade to investment-grade rating.

Collateral Performance

Serious delinquencies declined across all sectors in April. Prime delinquencies decreased by 10 basis points to 6.63%; Alt-A delinquencies decreased by 28 basis points to 15.14%; Option Arm delinquencies decreased by 51 basis points to 22.96% and Subprime delinquencies decreased by 68 basis points to 28.63%. Roll rates from current status to delinquency are holding stable near sector- level long-term averages.

Voluntary prepayments increased across all sectors but Subprime this month. Prime CRRs came in at 16.5%, up 311 basis points month-over-month; Alt-A CRRs were 12.1%, up 184 basis points month-over-month; Option Arm CRRs were 6.0%, up 113 basis points month-over-month and Subprime CRRs were 5.1%, down 35 basis points month-over-month. Month-over-month changes in CDRs increased across all sectors. Prime CDRs increased by 20 basis points to 1.64%; Alt-A CDRs increased by 16 basis point to 3.80%; Option Arm CDRs increased by 62 basis points to 5.45% and Subprime CDRs increased by 87 basis points to 6.02%.

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 5.4% across Case-Shiller’s 20 major city index. At the national level, changes in severities were declined across all sectors. At the state level, California Subprime severities decreased to 53% this month. Florida Subprime severities decreased to 87%. New York Subprime severities increased to 98%; and Nevada Subprime severities decreased to 67%.

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