Mortgage Market Monitor July 2019

Monthly Commentary


Market Update

Non-Agency RMBS had a rather mixed performance throughout July while risk assets in general and safe-haven assets had a positive month. The broader constructive market sentiment was fueled by expectations that the FOMC would cut interest rates by 25 bps at the end of the month and signal the beginning of a rate cutting cycle. Stocks and credit were higher with the S&P 500 reaching an all-time high during July, hitting 3,025 before retracing some of those gains (although still up 20.2% year to date). Early in the month, the UST 10yr yield fell below 2.0% for the first time since 2016, but ended July just slightly higher at 2.01%. Yields globally continued to drop as the amount of debt with negative yields increased to a record of 14 trillion. On the last day of July, the FOMC cut US interest rates by 25 bps but Jerome Powell disappointed the market by stating this was not the beginning of a long rate cutting cycle. The market sentiment reversed on this disappointment, the yield curve flattened and risk assets started selling off.

In Non-Agency RMBS, secondary trading volumes continued to decline with the summer slowdown taking full effect. Trace report 9.5bn of trading volume (down from 10.5bn in June) on 4.37bn of BWIC supply. While overall volumes dropped, legacy holders returned and were active sellers of block size positions. A highlight list was 233mm/6 subprime bonds coming from a REIT, most of which were originally sold from Maiden Lane II in 2011. Dealers were aggressive bidders, buying all bonds for position, but were only able to sell two by the end of the day. In CRT, light dealer inventories along with the deleveraging story (a faster buildup of credit enhancement from rising prepayments) in high GWAC deals continued to push spreads tighter and flatten the credit curve. B1s and all things higher yielding down the stack remained in demand and difficult to source, particularly as the prepayment story that had put pressure on seasoned M2s helped B1s & B2s delever faster. On-the-run CRT B1s saw levels in certain deals hit new tights and were 33-55 bps tighter on the month while M2s were 5 bps wider. Legacy spreads were mostly unchanged throughout the month.

The primary market in RMBS was active throughout July with issuance hitting 9.9bn, the third highest monthly volume of this year. Like in previous months, non-QM continued to be the busiest primary market in terms of deals and volume. Non-QM issuance established a new monthly record by finishing with 2.9bn (previous high was 2.4bn set in March of this year). A more comprehensive list of the deals issued in May is below:

Non-QM/Expanded Prime

  • 519mm STAR 2019-1: AAA/AAA rated A1 (31.05% CE/2.05 WAL) at 105/n, AA/AAA rated A2 (25.5% CE/2.05 WAL) at 125/n, A/AAA rated A3 (15.3% CE/2.05 WAL) at 140/n, BBB/AA rated M1 (9.35% CE/4.04 WAL) at 200/n, BB/A rated M2 (4.9% CE/4.04 WAL) at 300/n
  • 349mm SEMT 2019-CH2: AAA rated 4.5% PT A1 (15.00% CE/3.48 WAL) 165/n, Aa1/AAA rated 4.5% Mezz A19 (10.00% CE/3.48 WAL) 175/n
  • 417mm BHLD 2019-2 : AAA rated A1 (24.80% CE/2.50 WAL) 100/n, AA-/AAA rated A2 (16.55% CE/2.50 WAL) 120/n, A-/A rated A3 (7.65% CE/2.50 WAL) 130/n
  • 925mm ARRW 2019-3: AAA rated A1 (17.1% CE/3.5 WAL) 115/n, AA rated A2 (12.1% CE/3.5 WAL) 140/n, A rated A3 (4.85% CE/3.5 WAL) 160/n and BBB rated M1 (2.15% CE/6.5 WAL) at 235/n
  • 289mm GFMT 2019-2: AAA rated 4% PT A21 (20.00% CE/3.53 WAL) 160/n, AAA rated 3.5% PT A22 (20.00% CE/3.53 WAL) 145/n, AAA rated 3.5% FCF A42 (20.00% CE/2.23 WAL), AA/AAA rated 4% SNR MEZZ A31 (9.20% CE/3.53 WAL) 175/n, AA/AAA rated 3.5% SNR MEZZ A32 (9.20% CE/3.53 WAL) 155/n
  • 463mm OBX 2019-EXP2: Fixed: AAA rated 1-A3 (20% CE/3.3 WAL) at 150/n, AAA rated 1-A4 (11% CE/3.3 WAL) at 160/n. Floating: AAA rated 2-A1A (20% CE/2 WAL) at 90dm, 2-A1B (20% CE/4.32 WAL) at 125dm AAA rated 2-A1 (20% CE/2.46 WAL) at 100dm and AAA rated 2-A2 (11% CE/2.46 WAL) at 120dm
  • 431.5mm DRMT 2019-3: AAA rated A1s (37.45% CE/2.02 WAL) at 105/n, AA rated A2s (30.9% CE/2.02 WAL) at 115/n, A rated A3s (18.5% CE/2.02 WAL) at 125/n, BBB rated M1s (11.85% CE/4.09 WAL) at 160/n, BB rated B1s (6.45% CE/4.09 WAL) at 245/n, B rated B2s (1.9% CE/4.09 WAL) retained
  • 609mm CHASE 2019-ATR2: AAA rated 3.5% PT A3 (12.00% CE/4.87 WAL) 1-08bk Aug UMBS 3.5, AAA rated FCF A4 (12.00% CE/2.74 WAL) 2- 00bk Aug DW 3.5, AAA rated LCF A5 (12.00% CE/11.27 WAL) 135/n, AAA rated L+90 A11 (12.00% CE/4.87 WAL) 105dm, AAA rated 3.5% SSUP A15 (6.00% CE/4.87 WAL) 1-20bk Aug UMBS 3.5
  • 518mm AOMT 2019-4: AAA rated A1s (40.2% CE/1.94 WAL) at 100/n, AA rated A2s (33.3% CE/1.94 WAL) at 110/n, A rated A3s (20.1% CE/1.94 WAL) at 130n, BBB- rated M1s (11.5% CE/4.06 WAL) at 160n and BB rated B1s (7.25% CE/4.06 WAL) at 255n

Re-performing/Non-performing

  • 226mm PRET 2019-CFL1: Unrated A1s (32% CE/2.52 WAL) at 3.75% yield and unrated A2s (15% CE/2.52 WAL) at 5% yield
  • 156mm AJAXM 2019-D: AAA rated A1s (27.35%/4.14 WAL) at 120/n, AA rated A2s (24.2% CE/8 WAL) at 165/n and A rated A3s (18.95% CE/8 WAL) at 195/n
  • 320.5mm LMAT 2019-GS5: Unrated A1s (30% CE/2.38 WAL) at 3.2% yield and unrated A2s (20% CE/2.99 WAL) retained
  • 428.8mm NRZT 2019-RPL2: AAA rated A1 (36.40% CE/3.14 WAL) 95/n, AA rated A2 (30.40% CE/7.88 WAL) 140/n, A3/A rated M1 (24.60% CE/9.13 WAL) 175/n, Baa3/BBB rated M2 (19.85% CE/10.43 WAL) 200/n, BB rated B1 (16.25% CE/11.63 WAL) 240/n
  • 419mm PRPM 2019-3: Unrated A1s (32% CE/1.95 WAL) at 3.35% yield and unrated A2s (19% CE/2.98 WAL) at 4.458% yield
  • 336mm NRZT 2019-3: AAA/Aaa rated A-1A (13.5% CE/3.76 WAL) at 95/n

Credit Risk Transfer

  • 756mm STACR 2019-DNA3: A/A- rated M1 (3.25% CE/1.51 WAL) 73dm, BBB-/BB- rated M2 (1.10% CE/6.12 WAL) 205dm, BB/B rated B1 (0.60% CE/10.01 WAL) 325dm, unrated B2 (0.10% CE/10.01 WAL) 815dm
  • 993mm CAS 2019-R05: BBB+ rated 1M1s (3.65% CE/1.61 WAL) at 75dm, BB+ rated 1M2s (1.25% CE/5.48 WAL) at 200dm, unrated 1B1s (.25% CE/6.97 WAL) at 410dm

Prime Jumbo

  • 385mm JPMMT 2019-LTV2: AAA rated 3.5% PT A3 (20% CE/4.6 WAL) 1-00bk FN3.5, AAA rated 4.0% PT A18 (20% CE/4..6 WAL) 1-04bk FN4.0, FCF/75% A4 (20% CE/2.5 WAL) 1-24bk DW3.5, AAA rated 3.5% LCF/25% A5 (20% CE/10.7 WAL) 130/n, AAA rated L+95 A11 (20% CE/4.6 WAL) 95dm, AAA rated 3.5% A15 (12.0% CE/4.6 WAL) 1-16bk FN4.0
  • 531mm GSMBS 2019-PJ2: AAA rated A1 PT (15% CE/4.94 WAL) at 1-10bk FN4.0, AAA rated A6 75% FCF (15% CE/2.77 WAL)at 2-10bk DW4.0, AAA rated A8 25% LCF (15% CE/11.46 WAL) at 145/n and AAA A4 Sup PT (6.55% CE/4.94 WAL) at <0-22> vs. A1

Fix and Flip

  • 203mm LHOME 2019-RTL2: A1 (20.00% CE/2.37 WAL) 3.875% yld, A2 (10.00% CE/2.67 WAL) 4.375% yld, M (5.00% CE/2.67 WAL) 6.125% yld

Investor

  • 369mm VERUS 2019-INV2: AAA rated A1 (34.55% CE/2.38 WAL) 100/n, AA/AA+ rated A2 (26.85% CE/2.38 WAL) 120/n, A/AA- rated A3 (16.15% CE/2.38 WAL) 130/n, BBB-/A- rated M1 (9.40% CE/4.01 WAL) 165/n, BB-/BBB rated B1 (5.00% CE/4.01 WAL) 260/n

Collateral Performance

Changes to serious delinquencies were mixed across sectors in July. Prime delinquencies increased by 4 basis point to 3.29%; Alt-A delinquencies increased by 8 basis points to 8.19%; Option Arm delinquencies decreased by 41 basis points to 15.55% and Subprime delinquencies increased by 46 basis points to 18.61%.

In Puerto Rico, serious delinquencies spiked after hurricane Maria to 27.6% in Prime mortgages, 47.2% in Alt-A mortgages, and 58.8% in Subprime mortgages. These delinquency percentages have been on a declining trend since the beginning of 2018 and are now at or below pre-Maria levels. However, Prime and Subprime delinquencies have begun to rise again. Prime delinquencies increased 30 basis points to 11.23%, Alt-A delinquencies declined 57 basis points to 23.13% and Subprime delinquencies increased 351 bps to 36.91%.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 17.5%, down 331 basis points month-over-month; Alt-A CRRs were 14.4%, down 321 basis points month-over-month; Option Arm CRRs were 8.9%, down 115 basis points month-over-month and Subprime CRRs were 8.2%, up 63 basis points month-over-month. Month-over-month CDRs declined across sectors. Prime CDRs decreased by 1 basis point to 0.92%; Alt-A CDRs decreased by 25 basis points to 2.41%; Option Arm CDRs declined by 57 basis points to 4.31%, and Subprime CDRs decreased by 14 basis points to 4.12%.

Case-Shiller futures predict home prices will increase 1.0% annually during the next three years. Year-over-year, home prices are up 2.4% across Case- Shiller’s 20 major city index. At the national level, changes in severities were mixed across sectors. At the state level, California Subprime severities were lower at 46% this month. Florida Subprime severities were lower at 81%. New York Subprime severities declined to 75%; and Nevada Subprime severities decreased to 64%.

 

Media Attachments


This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. The information contained herein may include preliminary information and/or "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any forward-looking statements or opinions in this document. Any opinions expressed herein are current only as of the time made and are subject to change without notice. Past performance is no guarantee of future results. © 2019 TCW