Mortgage Market Monitor May 2018

Monthly Commentary

Market Update

The performance of the Non-Agency RMBS market throughout May can be characterized as resilient. Not only did May see an increase in secondary selling, but also heightened macro volatility with large moves in the rates market as the UST 10yr started May at 2.95%, widened out to 3.11% midmonth and then traded back to 2.86%. However, throughout the month, demand for legacy RMBS never wavered as real money and dealers remained aggressive bidders. Real money continued to be focused on the top of the capital structure in well enhanced and IG rated profiles while hedge funds selectively bought and sold in higher beta and storied profiles. Selling from a mix of legacy RMBS holders pushed secondary bid list supply up to 6.6bn (vs. 4.5bn in April) and Trace reported overall trading volumes increased to 18bn vs. 13.6bn in April. Dealers ended the month 810mm longer, leaving spreads unchanged across the capital structure. In CRT, spreads initially leaked wider in the first week of the month amidst macro volatility but reversed and grinded tighter on real money buying LCFs and B1s. M1 and LCF tranches were mostly unchanged on the month while B1s ended 10-25 bps tighter.

Fannie Mae's third deal of the year, 1.05bn CAS 2018-C03 that references a collateral pool with low LTV along with a higher percentage of high-DTI, priced at the wide end of guidance – 1M1 (BBB/BBB rated, 3.2% CE/1.61 WAL) at 68dm, 1M2 (B/B rated, 1.15% CE/5.92 WAL) at 215dm and 1B1 (NR/NR, .5% CE/9.96 WAL) at 375dm. WAMCO priced its inaugural deal, 1.2bn ARRW 2018-1. The transaction, which contains a higher % of loans with alternative sources of documentation as well as from foreign nationals, came out at the wider end of guidance - AAA rated A1 (21.1% CE/3 WAL) at 85/n/3.702% yield, AA rated A2 (14.7% CE/3 WAL) at 110/n/3.952% yield, A rated A3 (6.5% CE/3 WAL) at 130/n/4.152% yield. Deephaven issued its second non-QM deal of the year, 292mm DRMT 2018-2 - AAA rated A1 (37% CE/2 WAL) at 60/n/3.378% yield, AA rated A2 (30% CE/2 WAL) at 65/n/3.428% yield, A rated A3 (17% CE/2 WAL) at 80/n/3.578% yield. Caliber issued its second non-QM deal of the year, 359mm COLT 2018-2, wider than guidance - AAA rated A1 (31.3% CE/2 WAL) at 68/n/3.375% yield, AA rated A2 (24.5% CE/2 WAL) at 75/n/3.445% yield, A rated A3 (15.6% CE/2 WAL) at 85/n/3.545% yield. Towd Point issued 1.527bn TPMT 2018-2, its second RPL deal of the year – AAA/Aaa/AAA rated A1s (39.5% CE/2.83 WAL) at 69/n.

Collateral Performance

Serious delinquencies decreased across all sectors in May. Prime decreased by 12 basis point to 5.02%; Alt-A delinquencies decreased by 28 basis points to 11.42%; Option Arm delinquencies decreased by 31 basis points to 18.58% and Subprime delinquencies decreased by 42 basis points to 22.25%.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 13.1%, down 46 basis points month-over-month; Alt-A CRRs were 13.1%, up 29 basis points month-over-month; Option Arm CRRs were 10.0%, down 7 basis points month-over-month and Subprime CRRs were 8.6%, down 35 basis points month-over-month. Month-over-month changes in CDRs were either flat or decreasing. Prime CDRs decreased by 25 basis points to 1.37%; Alt-A CDRs decreased by 14 basis points to 3.55%; Option Arm CDRs decreased by 1 basis point to 4.72% and Subprime CDRs were flat at 5.21%.

Case-Shiller futures indicate a continuation of slow gains in residential home prices, predicting home prices will rise one to two percent annually during the next four 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 47% this month. Florida Subprime severities increased to 77%. New York Subprime severities increased to 86%; and Nevada Subprime severities increased to 77%.

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