Mortgage Market Monitor June 2018

Monthly Commentary

Market Update

For the better part of the first half of 2018, even as strong macro moves made headlines with domestic and global developments continually swaying market sentiment, Non-Agency RMBS investors managed to remain steadfast and push spreads further past post crisis tights. However, as the month of June progressed and came to a close, the escalation of trade tensions along with continued monetary tightening and hawkish tone from the Fed finally triggered a bit of weakness in the sector. While bid-ask spreads on individual bonds were framed wider in sympathy with broader market volatility, Non-Agencies still outperformed most risk assets. Prices ended the month generically flat to a point lower where a strong fundamental and technical backdrop kept constructive tone in place. Furthermore, price weakness was contained as majority of bonds are now held in a concentrated number of accounts who are not only holders but buyers on weakness, thus limiting widespread selling. Together with the start of summer, monthly bid list supply totaled just 3.1bn, which was below the previous multi-year low of 3.4bn set in February. In comparison, trading volume as reported by Trace remained somewhat elevated at 13.2bn as the result of a sizeable, out-of-comp portfolio sale that consisted mostly of derivatives and ended up going to one end account.

While secondary volumes experienced a typical slow summer month, June’s primary calendar was quite heavy which weighed on pricing levels. Angel Oak offered 384mm of certificates from its second issuance of the year, AOMT 2018-2. The AAA rated super senior A1 tranche priced at 76/n, which was 8 bps wider than where a comparable AAA rated A1 was issued in May from the preceding non-QM deal by Caliber. Similarly, two rated RPL transactions were issued at spreads wide of previous month’s levels. The AAA rated front pays from Mill City’s 438mm MCMLT 2018-2 and Towd Point’s 1.1bn TPMT 2018-3 came out at 75/n and 80/n, respectively. In credit risk transfer, Fannie Mae and Freddie Mac each had a transaction during June. Freddie’s 1.1bn STACR 2018-DNA2, which featured a B1 class that is no longer ERISA eligible but is the first ever to be rated, priced at 80dm, 215dm, and 370dm on the M1, M2, and B1, respectively. Meanwhile, Fannie’s 939mm CAS 2018-C04 saw the trend of fatter tails in the DTI distribution continue in high LTV collateral pool. The deal priced at 75dm on 2M1, 255dm on 2M2, and 450dm on 2B1

Collateral Performance

Serious delinquencies decreased across all sectors in June. Prime decreased by 7 basis point to 4.76%; Alt-A delinquencies decreased by 22 basis points to 11.02%; Option Arm delinquencies decreased by 28 basis points to 18.31% and Subprime delinquencies decreased by 61 basis points to 21.52%.

In Puerto Rico, serious delinquencies spiked after hurricane Maria to 27.6% in Prime mortgages, 47.2% in Alt-A mortgages, and 58.3% in Subprime mortgages. These delinquency percentages have been on a declining trend since the beginning of 2018 and continued their decline this month.

Prime delinquencies declined 258 bps to 19.8%, Alt-A delinquencies declined 126 basis points to 38.7% and Subprime delinquencies declined 131 bps to 44.3%.

Voluntary prepayments were increased across all sectors this month. Prime CRRs came in at 14.0%, up 91 basis points month-over-month; Alt-A CRRs were 14.3%, up 128 basis points month-over-month; Option Arm CRRs were 10.3%, up 34 basis points month-over-month and Subprime CRRs were 9.4%, up 95 basis points month-over-month. Month-over-month changes in CDRs were mixed. Prime CDRs decreased by 13 basis points to 1.29%; Alt-A CDRs decreased by 24 basis points to 3.35%; Option Arm CDRs increased by 4 basis points to 4.79%, and Subprime CDRs increased by 28 basis points to 5.53%.

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 6.6% 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 higher at 48% this month. Florida Subprime severities decreased to 76%. New York Subprime severities decreased to 82%; and Nevada Subprime severities decreased to 74%.


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