Mortgage Market Monitor April 2018

Monthly Commentary

Market Update

Non-Agency RMBS once again posted another strong month amidst a backdrop of elevated macro uncertainty. While various risks to a bullish economic outlook continued to intensify, such as escalating tensions of a potential trade war with China, spreads were stable and ended April mostly unchanged. The demand for mortgage credit assets was once again driven by real money accounts as well as the dealer community. Trace reported a slowdown in overall trading activity from 13.6bn in March to 12.2bn where dealers were net longer for the first time in three months by 651mm. Meanwhile, secondary bid list volumes stayed comparatively steady month-over-month and only dipped marginally to 4.5bn. A continuation of selling by legacy holders provided a measurable share of the supply, including another bid list from a GSE seller for the second month in a row. Consisting of nine subprime bonds totaling 626mm, it was the month’s largest list and saw all line items exchange hands. Positive fundamental and technical factors remained in place within Non-Agency RMBS and should continue to contribute to the sector’s low correlation to broader markets.

Non-prime securitization picked up in April as issuance included two transactions from repeat issuers. Shelter Growth issued its first of the year and third overall, 140mm SGR 2018-1, where the AAA rated super senior priced at 65/n. Invictus Capital Partners came out with its second deal of the year but one that’s entirely backed by investor properties. 249mm of VERUS 2018-INV1 was offered and the AAA rated senior A1 priced at 78/n.

Collateral Performance

Serious delinquencies decreased across all sectors in February. Prime decreased by 16 basis point to 5.27%; Alt-A delinquencies decreased by 39 basis points to 11.81%; Option Arm delinquencies decreased by 56 basis points to 18.90% and Subprime delinquencies decreased by 99 basis points to 22.77%.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 13.6%, up 242 basis points month-over-month; Alt-A CRRs were 12.8%, up 158 basis points month-over-month; Option Arm CRRs were 10.1%, up 171 basis points month-over-month and Subprime CRRs were 9.0%, down 177 basis points month-over-month. Month-over-month changes in CDRs all increased. Prime CDRs increased by 35 basis points to 1.57%; Alt-A CDRs increased by 79 basis points to 3.64%; Option Arm CDRs increased by 34 basis points to 4.69% and Subprime CDRs increased by 60 basis points to 5.17%.

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 6.8% 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 lower at 48% this month. Florida Subprime severities decreased to 75%. New York Subprime severities decreased to 78%; and Nevada Subprime severities decreased to 68%.

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