Mortgage Market Monitor August 2016

Monthly Commentary

September 16, 2016

Market Update

The summer slowdown that typically accompanies August was absent this year as the pace of bid lists from July carried over to the following month. With prices continuing their upward trend, sellers looked to capitalize on the strong tone and put out in the secondary markets a total of 6.5bn, which nearly matched the previous month’s amount of 6.6bn. A familiar and significant source of supply was once again the GSEs, who maintained their streak of selling with two bid lists during the first two weeks and a third one on the last day of the month. In all, the three lists equaled 1.3bn and accounted for 21% of August’s volume. Even as a variety of accounts ranging from GSEs to hedge funds kept August’s calendar busy, a broad base of investors, as well as the dealer community, kept bonds well sponsored. Short duration profiles at the top of the capital structure saw spreads grind tighter due to the ever growing appetite of insurance companies and money managers. Meanwhile, an increasing number of buyers in search of yield continued to extend further down in capital structure and dollar price. And while spreads sit near or at post crisis tights, sentiment remains constructive as tailwinds for the sector, mainly improving housing fundamentals and positive technicals, are intact.

As the Countrywide payout showed in June, the Non-Agency market is getting an additional technical boost from bank settlements, one of which took a significant step towards actual payment during the month. On August 12, the NY Supreme Court approved the 4.5bn JP Morgan rep and warranty settlement in its entirety for 319 deals. This paves the way for the trustees to obtain a private letter ruling from the IRS on the REMIC status of the deals and then final court approval. While there could be potential roadblocks similar to the Countrywide case, including objectors appealing the decision or discrepancies in the interpretation of cash flow waterfalls, it should be only a matter of time before investors receive the settlement amount, a large portion of which is expected to be reinvested back into the sector.

The primary market had a familiar issuer in the non-prime space price a deal in August. Following its inaugural transaction in December, Angel Oak’s second securitization was slightly smaller with 119mm of offered certificates and priced at strong levels. In credit risk transfer, Fannie Mae issued the only deal of the month. 1.2bn CAS 2016-C05, which references only high LTV loans, priced tighter than guidance – 2M1 at 135dm, 2M2 at 445dm, and 2B at 1,075dm.

Collateral Performance

Serious delinquencies decreased across all sectors but Prime in August. Prime delinquencies increased by 1 basis points to 6.54%; Alt-A delinquencies decreased by 5 basis points to 14.68%; Option Arm delinquencies decreased by 18 basis points to 21.92% and Subprime delinquencies decreased by 5 basis points to 27.32%. 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 13.6%, down 428 basis points month-over-month; Alt-A CRRs were 11.2%, down 251 basis points month-over-month; Option Arm CRRs were 6.5%, down 33 basis points month-over-month and Subprime CRRs were 4.8%, down 153 basis points month-over-month. Month-over-month changes in CDRs decreased in the Alt-A, Option Arm, and Subprime sectors, but increased in the Prime sector. Prime CDRs increased by 3 basis points to 1.38%; Alt-A CDRs decreased by 59 basis points to 3.4%; Option Arm CDRs decreased by 112 basis points to 4.42% and Subprime CDRs decreased by 143 basis points to 4.35%.

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 years. Year-over-year, home prices are up 5.1% 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 increased to 56% this month. Florida Subprime severities increased to 85%. New York Subprime severities decreased to 87%; and Nevada Subprime severities decreased to 73%.

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