Mortgage Market Monitor June 2016

Monthly Commentary

Market Update

If viewed within a vacuum and independent from external events, the price action and trading activity in Non-Agency RMBS during the month of June would have looked rather unremarkable. Similar to the previous three months, tone remained largely positive while volumes continued to drift lower. Stepping outside of the sector, however, investors were faced with a drastically different environment. Unprecedented political and economic uncertainty dominated headlines and shuffled sentiment from one end of the risk spectrum to the other. Heightened volatility impacted most corners of the markets as the month was bookended by a dismal jobs report at the beginning and Britain’s unexpected vote to exit the European Union near the end. Through all of this, the Non-Agency RMBS market was quiet. Secondary bid list supply totaled 3.7bn for all of June, which is the lowest monthly amount in recent memory and puts the total for the first half of 2016 at approximately 50% lower than that of last year. On top of low overall volume, the vast majority of bonds out for bid were small sizes; 84% of the number of line items had less than 5mm current face. As usual, money managers and insurance companies were the largest source of demand and helped spreads remain firm even as the dealer community continued to be net sellers (shorter by ~1bn excluding derivatives). While markets on individual CUSIPs were framed wider immediately following the Brexit vote, Non-Agency RMBS as a whole held in and saw much more inquiries from end accounts on buying versus selling. With strong housing fundamentals still in place and low/negative rates prevailing around the world, Non-Agency prices were steady and generally ended flat for June.

One factor that helped Non-Agency RMBS weather the macro turmoil of June was the anticipation and actual payment of the Countrywide settlement, which resulted in a positive technical tailwind. After waiting five years from the initial settlement announcement in June 2011, investors finally received payout for 512 out of 530 trusts that summed to 7.9bn. The 18 deals in which cash flow waterfalls are still in dispute will continue to go through the court process and the remaining 0.6bn in settlement is expected to arrive in 6-12 months.

Outside of the legacy space, there was some life in new issue activity during the month. A familiar issuer of non-prime RMBS with two previous transactions in 2015, Caliber Home Loans’ third securitization is the first ever to be rated since the housing crisis. The senior certificates that were offered totaled over 137mm and saw strong customer demand. The senior and senior mezz tranches, which were rated A and BBB, respectively, by DBRS and Fitch, were both oversubscribed. In credit risk transfer, Freddie Mac issued its fifth deal of the year. 786mm STACR 2016-DNA3 priced tighter than guidance – M1 at 110dm, M2 at 200dm, M3 at 500dm, and B at 1,125dm.

Collateral Performance

Serious delinquencies declined across all sectors in June. Prime delinquencies decreased by 9 basis points to 6.55%; Alt-A delinquencies decreased by 17 basis points to 14.92%; Option Arm delinquencies decreased by 32 basis points to 22.42% and Subprime delinquencies decreased by 29 basis points to 28.06%. Roll rates from current status to delinquency are holding stable near sector- level long-term averages.

Voluntary prepayments increased across all sectors this month. Prime CRRs came in at 17.7%, up 78 basis points month-over-month; Alt-A CRRs were 14.3%, up 192 basis points month-over-month; Option Arm CRRs were 5.14%, up 103 basis points month-over-month and Subprime CRRs were 6.9%, up 166 basis points month-over-month. Month-over-month changes in CDRs increased across all sectors. Prime CDRs increased by 36 basis points to 1.73%; Alt-A CDRs increased by 4 basis point to 3.95%; Option Arm CDRs increased by 39 basis points to 5.14% and Subprime CDRs increased by 20 basis points to 6.06%.

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 were declined across all sectors. At the state level, California Subprime severities decreased to 53% this month. Florida Subprime severities decreased to 87%. New York Subprime severities increased to 98%; and Nevada Subprime severities decreased to 67%.

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