Mortgage Market Monitor July 2016

Monthly Commentary

Market Update

The month of July in Non-Agencies couldn’t have felt any more different than the end of June. Following Britain’s unexpected decision to leave the EU, June ended with trading markets that were framed wider, but with little actually transacting in either direction. In July, however, with non-agency investors flush with cash from the $7.8bn Countrywide settlement paid on June 27th and a global reach for yield pushing assets to record levels (10yr UST yields down to 1.35%, 30yr UST yields down to 2.08% and the S&P up to 2,175), Non-Agencies flows jumped as spreads tightened across the capital structure. GSE selling picked up in July, selling 1.4bn of mostly post-settlement Countrywide paper in three separate bid lists. Hedge funds also sold post-settlement Countrywide bonds and opportunistically sold higher beta profiles into this recent strength. This jump in selling pushed supply for July up to 6.65bn (vs. 3.7bn last month). Even in the face of this heavier supply, robust demand from asset managers and insurance companies continued to keep bonds trading at strong levels. Investors in search of yield continued to move further out the curve into more levered profiles and select collateral stories. As the credit curve continued to flatten and spreads grinded tighter throughout July, Non-Agency RMBS prices ended the month 2-5 points tighter.

Fannie priced its fourth deal of the year, 1.32bn CAS 2016-C04, with strong subscription levels and tighter than guidance – 1M1’s at 145dm, 1M2’s at 425dm and 1B’s at 1025dm. Not long after its CAS 2016-C04 deal priced, Fannie Mae announced it planned to issue its fifth transaction (CAS 2016- C05) in August.

Collateral Performance

Serious delinquencies increased across all sectors but Option Arm in June. Prime delinquencies increased by 7 basis points to 6.60%; Alt-A delinquencies increased by 3 basis points to 14.93%; Option Arm delinquencies decreased by 31 basis points to 22.11% and Subprime delinquencies increased by 7 basis points to 28.16%. Roll rates from current status to delinquency are holding stable near sector- level long-term averages.

Voluntary prepayments decreased across all sectors this month. Prime CRRs came in at 17.9%, down 205 basis points month-over-month; Alt-A CRRs were 13.7%, down 134 basis points month-over-month; Option Arm CRRs were 6.85%, down 6 basis points month-over-month and Subprime CRRs were 6.92%, down 16 basis points month-over-month. Month-over-month changes in CDRs decreased in the Subprime and Prime sectors, but were flat and higher for the Alt-A and Option Arm sectors respectively. Prime CDRs decreased by 39 basis points to 1.33%; Alt-A CDRs were flat at 3.99%; Option Arm CDRs increased by 39 basis points to 5.51% and Subprime CDRs decreased by 27 basis points to 5.82%.

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 5.2% 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 48% this month. Florida Subprime severities increased to 79%. New York Subprime severities increased to 90%; and Nevada Subprime severities increased to 74%.

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