Mortgage Market Monitor July 2018

Monthly Commentary

Market Update

After June ended with a more cautious sentiment in the broader markets, easing tariff tension and positive economic data throughout July helped spreads rebound across risk assets. This positive sentiment also firmed up the Non-Agency RMBS market, allowing the sector to retrace some of June's spread widening. In addition, the summer slowdown continued to affect the Non-Agency RMBS market in July as trading activity slowed even further. After June’s monthly bid list supply set a multi-year low with 3.1bn, July’s bid list supply continued to dwindle ending at only 2.4bn. While activity from regular bid list sellers was light and selling from legacy holders was non-existent, demand remained robust with real money continuing to be the most aggressive bidders. This led to increased focus by end-accounts on dealers’ balance sheets, leaving dealers net shorter by 510mm on 7.2bn of Trace reported volume. Spreads across RMBS subsectors ended July 5-15 bps tighter. In settlements news, additional Lehman and JPM deals could see partial payments in the near future. For Lehman, intervening investors have asked for a partial severance order on 114 trusts, which would pave the way for payout in September if granted soon. In the JPM settlement, investors have requested partial severance order on eight more trusts.

New Issue

Invictus priced its second non-QM deal of the year, 489mm VERUS 2018-2, right around guidance.

  • AAA rated A1 (33.4% CE/2 WAL) at 75/n/3.583% yield, AA rated A2 (26% CE/2 WAL) at 85/n/3.683% yield, A rated A3 (13.2% CE/2 WAL) at 90/n/3.733% yield

Redwood priced its SEMT 2018-CH3 backed by 417mm of expanded prime/non-QM collateral, in line with guidance.

  • AAA rated 4.5% PT A1 (15% CE/3.48 WAL) at 100/n/3.87% yield, AAA rated 4% PT A2 (15% CE/3.48 WAL) at 90/n/3.77% yield, AAA rated 4.5% FCF A10 (15% CE/2.19 WAL) at 75/n/3.58% yield, AAA rated 4% FCF A11 (15% CE/2.19 WAL) at 65/n/3.48% yield, AAA rated 4.5% LCF A13 (15% CE/8.67 WAL) at 135/n/4.25% yield

Fannie Mae priced its fifth deal of the year, 983mm CAS 2018-C05. The M1 and M2 tranches priced in line with guidance while the B1s priced 25 bps wider.

  • BBB-/BBB rated M1s (3.35% CE/1.43 WAL) at 75dm, B/B rated M2s (1.15% CE/5.73 WAL) at 235dm) and NR/NR B1s (.50% CE/9.98 WAL) at 425dm

Collateral Performance

Serious delinquencies decreased across all sectors in July. Prime decreased by 4 basis point to 4.63%; Alt-A delinquencies decreased by 7 basis points to 10.89%; Option Arm delinquencies decreased by 26 basis points to 18.04% and Subprime delinquencies decreased by 19 basis points to 21.39%.

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 59 bps to 19.19%, Alt-A delinquencies declined 89 basis points to 38.84% and Subprime delinquencies declined 93 bps to 43.40%.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 12.6%, down 131 basis points month-over-month; Alt-A CRRs were 13.6%, down 69 basis points month-over-month; Option Arm CRRs were 10.2%, down 3 basis points month-over-month and Subprime CRRs were 10.7%, up 136 basis points month-over-month. Month-over-month CDRs declined across all sectors. Prime CDRs decreased by 23 basis points to 1.11%; Alt-A CDRs decreased by 36 basis points to 3.02%; Option Arm CDRs decreased by 15 basis points to 4.70%, and Subprime CDRs decreased by 35 basis points to 4.58%.

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 6.5% 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 52% this month. Florida Subprime severities decreased to 75%. New York Subprime severities decreased to 84%; and Nevada Subprime severities decreased to 67%.


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