Mortgage Market Monitor August 2018

Monthly Commentary

September 20, 2018

Market Update

Extending from fresh high water marks reached by the S&P 500 and NASDAQ Composite Indices all the way to record lows set by the Turkish Lira and Argentine Peso, risk sentiment varied considerably across broader global and domestic markets during the month of August. Sitting in the middle of the spectrum was the Non-Agency RMBS sector, which continued on a steady path like it has for most of the year. Consistent demand from real money accounts kept spreads trading in a tight range near or at post crisis tights, albeit on a slow summer month with 7.6bn volume according to Trace. While secondary bid list supply improved from July’s multi-year low of 2.4bn to 2.9bn with the help of sales from a bank portfolio that totaled 558mm, demand from end accounts still left dealers lighter by 672mm and spreads largely unchanged for the month.

The primary calendar remained active during August with several rated non-QM and RPL issuances. A new issuer stepped into the non-QM space. Starwood Capital priced its inaugural 364mm STAR 2018-IMC1 in line with guidance where the AAA rated super senior A1 came at out 82/n. Angel Oak, one of the earliest issuers of non-QM, brought its third deal of the year, 382mm AOMT 2018-3. The AAA rated super senior A1 priced at 73/n, which was 3bps tighter than where corresponding A1 tranche from preceding AOMT 2018-2 priced in June. Meanwhile, there were three RPL transactions during the month. The AAA front pay A1s from Citigroup’s 250mm CMLTI 2018-RP3 and Towd Point’s 771mm TPMT 2018-4 priced at 83/n and 85/n, respectively. MetLife issued its second ever RPL deal, 465mm MST 2018-1. The AAA rated senior A priced tighter than guidance at 78/n.

Collateral Performance

Serious delinquencies decreased across all sectors in August. Prime decreased by 8 basis point to 4.18%; Alt-A delinquencies decreased by 13 basis points to 10.30%; Option Arm delinquencies decreased by 21 basis points to 17.69% and Subprime delinquencies decreased by 37 basis points to 20.81%.

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 continued their decline this month. Prime delinquencies declined 143 bps to 17.76%, Alt-A delinquencies declined 241 basis points to 35.44% and Subprime delinquencies declined 211 bps to 41.29%.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 13.1%, up 46 basis points month-over-month; Alt-A CRRs were 14.0%, up 46 basis points month-over-month; Option Arm CRRs were 10.5%, up 37 basis points month-over-month and Subprime CRRs were 7.4%, down 324 basis points month-over-month. Month-over-month CDRs were also mixed across sectors. Prime CDRs increased by 11 basis points to 1.24%; Alt-A CDRs increased by 1 basis point to 3.07%; Option Arm CDRs decreased by 24 basis points to 4.52%, and Subprime CDRs decreased by 15 basis points to 4.47%.

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 6.3% 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 lower at 50% this month. Florida Subprime severities increased to 90%. New York Subprime severities increased to 86%; and Nevada Subprime severities increased to 77%.


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