Mortgage Market Monitor May 2017

Monthly Commentary

Market Update

Similar to April, spreads for all Non-Agency RMBS sectors continued to grind tighter throughout the month of May. This was in correlation with the broader markets, where it was another month of low volatility and strong performance by global risk assets. Demand for legacy RMBS paper continued to be very robust - the lack of supply and reinvestment demand from paydowns drove a supportive technical environment while improving fundamentals continued to be a tailwind. Senior well enhanced profiles were aggressively bid by real money accounts and dealers. Further out the curve in higher beta/collateral specific stories saw continued support from real money while hedge funds bought and sold selectively. With multiple lists of block size senior bonds out for bid throughout May, trade levels continuously pushed spreads through post crisis tights. After both GSEs were absent from selling in April, a GSE returned to selling in early May with a 491mm/9 line item bid list. The entire list traded at strong levels with dealers buying most of the higher dollar priced cleaner profiles while hedge funds were aggressive on the levered profiles. Later in the month, there was a 549mm/24 line item bid list from a federal agency, which traded well above expectations. For the month of May, secondary supply jumped up to 5.83bn (vs. 3.5bn the month prior), Trace reported 16.3bn of trading volume and dealers were net longer by 530mm leaving spreads 15-20 bps tighter.

In new issue CRT, Fannie Mae priced its third deal of the year, 1.371bn CAS 2017-C03, tighter than guidance – 1M1’s (Baa3/BBB rated, 2.55% CE, 1.67 WAL) at 95dm, 1M2’s (B2/B rated, 1% CE, 6.57 WAL) at 300dm and 1B1’s (NR, .5% CE, 9.96 WAL) at 485dm. Later in the month, Fannie priced its fourth deal of the year, 1bn CAS 2017-C04, tighter than guidance – 2M1’s (BBB-/BBB rated, 3.1% CE, 1.49 WAL) at 85dm, 2M2’s (B/B+ rated, 1% CE, 6.05 WAL) at 285dm and 2B1’s (NR, .5% CE, 9.99 WAL) at 505dm.

Collateral Performance

Serious delinquencies declined across all sectors again in May. Prime decreased by 8 basis points to 6.08%; Alt-A delinquencies decreased by 8 basis point to 13.43%; Option Arm delinquencies decreased by 15 basis points to 19.96% and Subprime delinquencies decreased by 5 basis points to 24.92%. Roll rates from current status to delinquency continue to be held in at very low levels.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 17.0%, up 135 basis points month-over-month; Alt-A CRRs were 14.2%, up 21 basis points month-over-month; Option Arm CRRs were 8.7%, down 22 basis points month-over-month and Subprime CRRs were 9.6%, up 218 basis points month-over-month. Month-over-month changes in CDRs were mixed as well. Prime CDRs increased by 28 basis points to 1.83%; Alt-A CDRs decreased by 46 basis points to 3.82%; Option Arm CDRs decreased by 52 basis points to 4.67% and Subprime CDRs decreased by 69 basis points to 5.98%.

Case-Shiller futures continue to reflect a broad recovery in home prices, predicting home prices will rise one to two percent annually during the next four years. Year-over-year, home prices are up 3.8% 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 up slightly to 46% this month. Florida Subprime severities increased to 77%. New York Subprime severities increased to 89%; and Nevada Subprime severities were declined to 66%.

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