Mortgage Market Monitor August 2019

Monthly Commentary

September 19, 2019

Market Update

There was no shortage of market moving events for investor to process over the course of August. From the surprise outcome of Argentina’s election that roiled the nation’s financial markets to the escalation of the US-China trade war, the constant shift in news headlines whipsawed sentiment and ultimately overwhelmed risk assets. The S&P Index had 11 out of 22 trading sessions with more than 1% moves and ended down by nearly 2% for the month. Meanwhile, heightened volatility and fears of a global slowdown pushed investors to safe haven assets where the 30 year Treasury hit a fresh all-time low in yield. In between the two extremes, the overall Non-Agency market followed a familiar pattern of narrow trading ranges as solid collateral performance helped maintain the sector’s value proposition. However, the dramatic rally in rates did manage to leave outsized impressions on certain profiles. With mortgage rates reaching levels not seen since 2016, faster anticipated prepayment speeds and quicker deleveraging motivated sponsorship in lower parts of the capital structure from buyers in search for yield. On the other hand, the same dynamic continued to highlight convexity risks and to put pressure on high premium dollar priced bonds. In the absence of widespread forced selling pressure, together with the usual summer slowdown, the amount of bonds place in competition only totaled 2.6 billion and replaced the previous low of the year set in April (2.8 billion). The lack of secondary supply led end accounts to focus on dealer balance sheets, leaving dealers net shorter by 84 million on 7.5 billion of trading through Trace.

Despite the pick-up in macro volatility, the primary calendar for private label securities remained active and saw over 7 billion come to market. Deals priced without much difficulty and included a growing list of issuers, particularly in Non-QM where Credit Suisse and Citi both issued inaugural transactions. Below is a full list of new issues during August.

Non-QM

  • 324mm BRAVO 2019-NQM1 from PIMCO containing seasoned non-QM collateral redeemed from four 2016/2017 COLT deals: AAA rated A1 (20.60% CE/1.74 WAL) 100/e, AA/AA+ rated A2 (14.85% CE/1.74 WAL) 122/e, A/AA- rated A3 (8.95% CE/1.74 WAL) 132/e, BBB/A rated M1 (5.85% CE/3.20 WAL) 150/n, BB/BBB rated B1 (2.90% CE/3.20 WAL) 250/n
  • Invictus Capital’s third non-QM deal of the year, 569mm VERUS 2019-3: AAA rated A1 (32.95% CE/2.03 WAL) 110/n, AA/AAA rated A2 (26.95% CE/2.03 WAL) 125/n, A/AA- rated A3 (15.15% CE/2.03 WAL) 135/n, BBB-/BBB+ rated M1 (7.95% CE/3.95 WAL) 160/n, BB/BBBrated B1 (5.00% CE/3.95 WAL) 250/n
  • 557mm JPMMT 2019-HYB1 from JPMorgan collateralized by prime hybrid ARMs that are 44% non-QM: AAA rated WAC PT A2 (15.00% CE/3.07 WAL) 150/n, AAA rated 3.0% PT A2A (15.00% CE/3.07 WAL) 135/n, AA+/AAA rated 3.0% SNR SUPP A5A (7.50% CE/3.07 WAL) 145/n
  • Inaugural non-QM issuance by Credit Suisse, 363mm CSMC 2019-AFC1: AAA rated A1 (20.90% CE/2.92 WAL) 110/n, AA rated A2 (15.15% CE/2.92 WAL) 130/n, A rated A3 (6.65% CE/2.92 WAL) 140/n, BBB rated M1 (3.30% CE/4.03 WAL) 165/n, BB rated B1 (1.30% CE/4.02 WAL) 265/n
  • Neuberger Berman’s 378mm HOF 2019-2: AAA rated A1 (35.30% CE/2.63 WAL) 115/n, AA rated A2 (28.40% CE/2.63 WAL) 135/n, A rated A3 (17.10% CE/2.63 WAL) 145/n, BBB rated M1 (10.80% CE/5.26 WAL) 185/n, BB rated B1 (5.90% CE/5.26 WAL) 265/n
  • Inaugural deal from Citi, 363mm CMLTI 2019-IMC1: AAA rated A1 (30.15% CE/2.07 WAL) 110/n, AA+/AA rated A2 (26.45% CE/2.07 WAL) 130/n, A rated A3 (15.20% CE/2.07 WAL) 140/n, BBB rated M1 (9.40% CE/4.08 WAL) 170/n, BB rated B1 (4.60% CE/4.08 WAL) 250/n, B rated B2 (1.45% CE/4.08 WAL) 5.375% yield

Prime Jumbo

  • 369mm SEMT 2019-3 issued by Redwood: AAA rated 3.5% PT A2 (15.00% CE/4.96 WAL) 1-06 bk FNCL3.5, AAA rated 3.5% FCF A5 (15.00% CE/2.83 WAL) 2-00 bk FNCI3.5, AAA rated 3.5% LCF A8 (15.00% CE/11.33 WAL) 130/n, Aa1/AAA rated SNR MEZZ A20 (5.00% CE/4.96 WAL) 1-20 bk FNCL3.5
  • 789mm JPMMT 2019-6 from JPMorgan: AAA rated 3.5% PT A3 (12.00% CE/4.98 WAL) 1-06 bk Sep UMBS3.5, AAA rated 3.5% FCF A4 (12.00% CE/2.77 WAL) 2-08 bk Sep DW3.5, AAA rated 3.5% LCF A5 (12.00% CE/11.59 WAL) 145/n, AAA rated L+90 A11 (12.00% CE/4.98 WAL) 95dm, Aa1/AAA rated SNR SUPP A15 (6.00% CE/4.98 WAL) 1-18 bk Sep UMBS3.5
  • Chimera’s first prime jumbo deal of the year, 314mm CIM 2019-J1: AAA rated 3.5% PT 1A2 (15.00% CE/4.92 WAL) 1-10 bk FNCL3.5, AAA rated 3.5% FCF 1A5 (15.00% CE/2.80 WAL) 2-06 bk FNCI3.5, AAA rated 3.5% LCF 1A8 (15.00% CE/11.27 WAL) 140/n

Non-performing/Re-performing

  • Lone Star’s unrated NPL 395mm VOLT 2019-NPL4: A1A (46.43% CE/1.25 WAL) 3.375% yield, A1B (33.00% CE/2.97 WAL) 4.186% yield, A2 (25.91% CE/2.97 WAL) 5.50% yield
  • New Residential's 559mm NRZT 2019-4 backed by seasoned performing/re-performing mortgages from called legacy deals: AAA rated A1B (25.50% CE/3.16 WAL) 100/n
  • 73mm unrated BOMFT 2019-LT1 issued by Bayview: A1 (43.20% CE/1.61 WAL) 3.25% yield
  • 18th overall GCAT securitization and first rated RPL from Angelo Gordon, 271mm GCAT 2019-RPL1: AAA rated A1 (41.25% CE/2.75 WAL) 105/n, AA rated M1 (36.30% CE/6.64 WAL) 145/n, A3/A rated M2 (31.50% CE/7.49 WAL) 180/n, Baa3/BBB rated M3 (25.00% CE/8.62 WAL) 210/n, Ba3/BB rated B1 (21.25% CE/9.77 WAL) 250/n, B3/B rated B2 (17.00% CE/10.81 WAL) 330/n
  • Unrated NPL 527mm STWH 2019-NPB1: A1 (45.08% CE/1.55 WAL) 3.399% yield
  • Lone Star’s second unrated NPL of the month, 582mm VOLT 2019-NPL5: A1A (44.99% CE/1.47 WAL) 3.375% yield, A1B(32.10% CE/2.99 WAL) 4.25% yield, A2 (25.74% CE/2.99 WAL) 5.25% yield
  • Unrated 279mm CSMC 2019-RPL8 with RPL collateral from Credit Suisse: A1 (27.50% CE/2.47 WAL) 3.25% yield

Second Lien

  • Rated second lien deal from Goldman Sachs, 359mm GSMBS 2019-SL1: AAA rated A1 (46.20% CE/2.72 WAL) 125/n Credit Risk Transfer
  • Freddie Mac’s second overall FTR issuance, 284mm STACR 2019-FTR2, which is collateralized by seasoned loans instead of referencing a retained CRT B2 position: BBB/BBB- rated M1 (2.50% CE/1.81 WAL) 95dm, BB-/B+ rated M2 (1.10% CE/5.87 WAL) 215dm, B- rated B1 (0.60% CE/9.93 WAL) 300dm, unrated B2 (0.10% CE/10.01 WAL) 740dm

Collateral Performance

The percentage of serious delinquencies declined across sectors in August. Prime delinquencies decreased by 3 basis point to 3.17%; Alt-A delinquencies decreased by 7 basis points to 7.96%; Option Arm delinquencies decreased by 8 basis points to 15.47% and Subprime delinquencies decreased by 22 basis points to 18.25%.

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.

Prime delinquencies decreased 87 basis points to 10.36%, Alt-A delinquencies declined 97 basis points to 22.16% and Subprime delinquencies decreased 115 bps to 35.73%.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 19.8%, up 234 basis points month-over-month; Alt-A CRRs were 16.3%, up 194 basis points month-over-month; Option Arm CRRs were 10.4%, up 158 basis points month-over-month and Subprime CRRs were 7.7%, down 46 basis points month-over-month. Month-over-month CDRs were also mixed across sectors. Prime CDRs decreased by 2 basis points to 0.92%; Alt-A CDRs increased by 24 basis points to 2.71%; Option Arm CDRs declined by 15 basis points to 4.23%, and Subprime CDRs increased by 16 basis points to 4.36%.

Case-Shiller futures predict home prices will increase 1.0% annually during the next three years. Year-over-year, home prices are up 2.1% 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 higher at 48% this month. Florida Subprime severities were lower at 78%. New York Subprime severities increased to 77%; and Nevada Subprime severities increased to 69%.

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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