Mortgage Market Monitor May 2019

Monthly Commentary


Market Update

Trade disputes took center stage in May and were the month’s primary market driver as tensions fluctuated between the US and China and unexpectedly with Mexico. Trouble began in the first half of May ahead of the scheduled negotiations in Washington DC as Trump threatened another round of tariffs on Chinese goods. After negotiations failed to make any progress, the US increased tariffs to 25% from 10% on 200 billion of Chinese goods. The following week, China retaliated by announcing a new round of tariffs on 60 billion of US goods. Towards the end of May, the Trump administration announced a potential tariff on all Mexican imports that would start at 5% and grow steadily to 25%. The deterioration in trade talks induced concern and volatility across the capital markets – most risk assets exhibited weakness while US rates rallied. The move across the rates curve was impressive as the UST 10yr rallied to 2.12% from 2.50%, the UST 30yr to 2.56% from 2.90% and the 3mo/10yr UST curve inverted at - 22bps. Across Non-Agency RMBS, the effect of the risk off sentiment caused by the trade disputes varied across the sector. Legacy RMBS remained firmly bid and was well supported throughout the month by real money accounts and dealers, who continued to aggressively add paper. The GSEs returned to the market in late May with a 406 million 8 line item bid list of mostly pro rata subprime pass thrus. The list traded well with spreads for that segment of the market moving ~10bps tighter and all but one bond trading to end-accounts by the end of the day. Meanwhile in CRT, not only did the broader risk off move lead to increased spread volatility across the asset class, but faster prepay expectations from the rally in rates added pricing pressure on seasoned high premium dollar priced bonds. On-the-run CRT names ended 10bps wider while seasoned higher dollar priced bonds widened 35-45bps. May ended with 15.9 billion of Trace reported trading volume on 5.59 billion of bid list supply, leaving dealers only 85 million longer on the month.

In May, the primary market remained active although issuance dropped to 4.9 billion from April’s 10.6 billion. The Non-QM/expanded prime sector continued to be the busiest primary market in terms of deals and volume. Two new non-QM issuers came to market in May: Carrington issued its inaugural non-QM deal, SHMLT 2019-SH1 and Angelo Gordon issued GCAT 2019-NQM1, which contained a high percentage of CDFI (Community Development Financial Institution) loans. Freddie Mac issued its inaugural “FTR” transaction, STACR 2019-FTR1. In this transaction, Freddie is taking their retained position in STACR 2018-DNA2 B2 (currently the 0-54 bps cut) and selling the 10-54 bps of risk in the form of the newly created FTR1 B2s. A more comprehensive list of the deals issued in May is below:

Non QM/Expanded Prime

  • 919mm ARRW 2019-2: AAA/AAA rated A1 (16% CE/3.5 WAL) at 110n/3.301% yield, AA/AA+ rated A2 (12.5% CE/3.5 WAL) at 125n/3.451% yield, A/A+ rated A3 (5.45% CE/3.5 WAL) at 155n/3.751% yield and BBB/BBB+ rated M1 (2.8% CE/6.5 WAL) at 250n/4.75% yield 8
  • 578mm VERUS 2019-2: AAA/AAA rated A1 (31.85% CE/1.86 WAL) at EDSF+82, AA/AA+ rated A2 (25.9% CE/1.86 WAL) at EDSF+95, A/A rated A3 (14.5% CE/1.86 WAL) at EDSF+105, BBB-/BBB rated M1 (7.8% CE/3.01 WAL) at 150/n, BB/BB+ rated B1 (5% CE/3.01 WAL) at 215/n
  • 274mm SHMLT 2019-SH1: AAA/AAA rated A1s (38.65% CE/2.01 WAL) at 100/n, AA/AA+ rated A2s (31.65% CE/2.01 WAL) at 115/n, A/A+ rated A3s (18.1% CE/2.01 WAL) at 125/n, BBB/BBB+ rated M1s (11.5% CE/4.08 WAL) at 185/n, BB/BB+ rated B1s (6.3% CE/4.08 WAL) at 275/n and B/B- rated B2s (2.4% CE/4.08 WAL) at 6.125% yield
  • 365mm GCAT 2019-NQM1: AAA rated A1 (29.5% CE/2.0 WAL) at 95/n, AA/AAA rated A2 (22.9% CE/2.0 WAL) at 120/n, A/AA rated A3 (12.0% CE/2.0 WAL) at 135/n

Credit Risk Transfer

  • 140mm STACR 2019-FTR1: Unrated B2s (.10% CE/10 WAL) at 835dm Prime Jumbo
  • 554mm WFMBS 2019-2: AAA rated 4.0% PT A1 (15.0% CE/5.0 WAL) at 1-02 bk FN4, AAA rated 4.0% FCF A3 (15.0% CE/2.8 WAL) at 1-10 bk DW4 and AAA rated 4.0% LCF A5 (15.0% CE/11.6 WAL) at 130/n
  • 401mm SEMT 2019-2: AAA rated 4.0% PT A1 (15.0% CE/4.9 WAL) at 0-30 bk FN4, AAA rated 4.0% FCF A4 (15.0% CE/2.8 WAL) at 1-10 bk DW4, AAA rated 4.0% LCF A7 (15.0% CE/11.3 WAL) at 130/n

Non-performing/Re-performing

  • 212mm RCO 2019-1: Unrated A1s (39.8% CE/1.67 WAL) at 3.75% yield Investor
  • 339mm JPMMT 2019-INV1: JPMMT 2019-INV1: AAA rated 4.0% PT A3 (20.0% CE/4.6 WAL) at 125/n, AAA rated L+95 A11 (20.0% CE/4.6 WAL) at 95dm
  • 364mm CIM 2019-INV2: AAA rated 4.0% PT A3 (20%CE/4.6 WAL) at 125/n, AAA rated L+95 A11 (20%CE/4.6 WAL) at 95dm 9
  • 163mm VISIO 2019-1: AAA rated A1 (35% CE/2.8 WAL) at 110/n, AA rated A2s (28.4% CE/2.8 WAL) at 120/n, A rated A3s (16.7% CE/2.8 WAL) at 135/n, BBB rated M1s (10.7% CE/3.9 WAL) at 165/n, and BB rated B1s (5.45% CE/3.9 WAL) at 265/n

Collateral Performance

Changes to serious delinquencies declined across sectors in May. Prime delinquencies decreased by 7 basis point to 3.40%; Alt-A delinquencies decreased by 13 basis points to 8.54%; Option Arm delinquencies decreased by 27 basis points to 16.20% and Subprime delinquencies decreased by 33 basis points to 18.50%.

In Puerto Rico, serious delinquencies spiked after hurricane Maria to 27.6% in Prime mortgages, 47.2% in Alt-A mortgages, and 58.8% in Subprime mortgages. These delinquency percentages have been on a declining trend since the beginning of 2018. Prime delinquencies declined 41 basis points to 10.85%, Alt-A delinquencies declined 106 basis points to 23.98% and Subprime delinquencies declined 89 bps to 34.15%.

Voluntary prepayments increased across sectors this month. Prime CRRs came in at 15.6%, up 227 basis points month-over-month; Alt-A CRRs were 13.1%, up 193 basis points month-over-month; Option Arm CRRs were 9.5%, up 25 basis points month-over-month and Subprime CRRs were 6.4%, up 63 basis points month-over-month. Month-over-month CDRs declined across all sectors. Prime CDRs decreased by 31 basis points to 0.97%; Alt- A CDRs decreased by 25 basis points to 2.36%; Option Arm CDRs decreased by 33 basis points to 4.57%, and Subprime CDRs decreased by 14 basis points to 4.00%.

Case-Shiller futures improved this month, predicting home prices will increase 1.0% annually during the next four years. Year-over-year, home prices are up 2.7% across Case-Shiller’s 20 major city index. At the national level, changes in severities were mixed across sectors. At the state level, California Subprime severities were lower at 52% this month. Florida Subprime severities were higher at 86%. New York Subprime severities were flat at 90%; and Nevada Subprime severities increased to 77%.

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