Mortgage Market Monitor May 2016

Monthly Commentary

Market Update

The month of May felt very much like a continuation of April in the Non-Agency RMBS market. With the absence of any significant macro news or volatility, besides FOMC minutes that were more hawkish than expected, a positive and constructive tone persisted within the sector throughout the month. Demand from money managers and insurance companies, which has been a consistent theme, continued to be robust at the top of the capital structure in well enhanced and IG profiles. Although still low in comparison to 2015 levels, interest further out the credit curve increased as investors started to feel comfortable again with more complex, higher beta profiles. Bid list selling picked up slightly to $5.9bn in May (vs. $5.2bn in April), but was still much lower than May 2015’s $10.1bn as volumes have yet to fully recover from the first quarter’s volatility. One of the highlight bid lists of May was a $250mm all-or-none list of mostly Investment Grade profiles from a money manager seller. The list traded extremely well with the aggregated line item bids for the portfolio coming in at above market levels. This was not surprising considering the demand for higher quality assets though it was somewhat surprising that it ultimately traded to a single buyer. With broader risk assets still rallying from February lows, coupled with the continued search for yield and strong housing fundamentals, Non-Agency RMBS assets ended the month 1-2 points higher.

In settlement news, the $8.5bn CWL settlement had another positive development in May with the NY State Court approving the Trustee’s proposed judgment for 512 deals. Bondholders can now expect a $7.8bn settlement payment to come through in June remits for the 512 undisputed deals. Further court proceeds for the remaining 18 disputed trusts are pending with a timeline to payment at approximately 6-12 months.

Freddie Mac issued two risk sharing deals in May, both of which were well received. The first deal was its second low LTV transaction of the year, $916mm STACR 2016-DNA2, which priced tighter than guidance – M1 at 125dm, M2 at 220dm, M3 at 495dm and B at 1,050dm. Later in the month, Freddie issued its second high LTV deal of the year, $627mm STACR 2016-HQA2 deal, pricing at 120dm on M1, 225dm on M2, 515dm on M3, and 1150dm on B.

Collateral Performance

Serious delinquencies declined across all sectors in May except for Prime. Prime delinquencies increased by 4 basis points to 6.69%; Alt-A delinquencies decreased by 6 basis points to 15.12%; Option Arm delinquencies decreased by 22 basis points to 22.74% and Subprime delinquencies decreased by 21 basis points to 28.42%. Roll rates from current status to delinquency are holding stable near sector-level long-term averages.

Voluntary prepayments rose across all sectors this month. Prime CRRs came in at 16.9%, up 25 basis points month-over-month; Alt-A CRRs were 12.5%, up 17 basis points month-over-month; Option Arm CRRs were 6.1%, up 13 basis points month-over-month and Subprime CRRs were 5.3%, up 27 basis points month-over-month. CDRs decreased across all sectors except for Alt-A this month. Prime CDRs decreased by 35 basis points to 1.35%; Alt-A CDRs increased by 1basis point to 3.84%; Option Arm CDRs decreased by 94 basis points to 4.51% and Subprime CDRs decreased by 22 basis points to 5.82%.

Case-Shiller futures continue to reflect a broad recovery in home prices, predicting home prices will rise two to 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 declined across all sectors except for Option Arm. At the state level, California Subprime severities decreased to 52% this month. Florida Subprime severities decreased to 82%. New York Subprime severities decreased to 90%; and Nevada Subprime severities decreased to 66%.

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