Mortgage Market Monitor September 2017

Monthly Commentary

Market Update

The Non-Agency RMBS market began September just like it had ended August, focused on a major Atlantic hurricane with a forecasted path to once again strike the southern United States. Like Hurricane Harvey, which had just caused catastrophic damage to Houston and southern Texas as a Category 4, Hurricane Irma was barreling through the Caribbean with every meteorologist forecasting a direct hit to Miami as either a Category 4 or 5. In addition to assessing the impact of Houston MSA exposure in RMBS deals, investors had to grapple with coastal Florida MSA exposure as the largest Atlantic hurricane since Katrina bore down on the region. Initial uncertainty as to where delinquencies and cum losses would end up reminded investors of the idiosyncratic risk implicit in the structurally levered credit risk transfer (CRT) market. This led to increased volatility, adversely impacting spreads and sponsorship in credit risk transfer deals while legacy RMBS remained well supported. Spreads in credit risk transfer B1 tranches in some cases were quoted 140 bps wider from pre-hurricane levels and legacy RMBS spreads were unchanged. In the end, Miami avoided a direct hit and Irma weakened as it moved up the Gulf coast of Florida bringing less damage than expected. Investors returned to their seats the following Monday with some optimism and spreads in the CRT B1 tranches gapped 75 bps tighter. CRT volatility subsided and then overall market activity quieted down as most market participants attended the annual ABS East conference. Demand for legacy RMBS never dwindled throughout the month and remained robust across the capital structure. Real money accounts aggressively bid the top of the capital structure in IG and well enhanced profiles, while in longer duration and specific collateral stories, money manager sponsorship persisted and hedge funds bought and sold selectively. Even as spreads moved further through post crisis tights, investors still viewed the legacy RMBS sector as attractive due to improving housing fundamentals, yields quoted to loss adjusted scenarios and negative net supply. Legacy holders were once again the biggest source of supply as monthly secondary supply totaled 5.4bn and Trace reported 15.6bn of volume. Dealers were net longer by 735mm leaving Non- Agency RMBS spreads tighter by 10-15 bps, CRT low LTV B1’s 15-30 bps tighter and high LTV B1’s unchanged to 25 bps wider.

Freddie Mac priced its third low LTV deal of the year, 1.2bn STACR 2017-DNA3, tighter than guidance - M1’s (BBB/BBB-, 2.5% CE, 2.37 WAL) at 75dm, M2’s (B/B+, 1% CE, 6.75 WAL) at 250dm and the B1’s (NR/NR, .50% CE, 9.98 WAL) at 445dm. Prior to coming to market with this deal, Freddie announced that they would exclude all loans from the reference pool that are in FEMA disaster areas receiving individual assistance associated with Hurricanes Harvey and Irma. Caliber priced its second non-QM deal of the year, 426mm COLT 2017-2, in line with guidance - AAA rated A1A (40% CE/2 WAL) at 75n/2.346% yield, AA rated A2A (29% CE/2 WAL) at 90n/2.496% yield, A rated A3A (16% CE/2 WAL) at 110n/2.696% yield, BBB rated M1 (10% CE/4 WAL) at 170n/3.474% yield, and BB rated B1 (6% CE/4 WAL) at 275n/4.524% yield. Redwood Trust issued its first deal containing non-QM loans, 306mm SEMT 2017-CH1 - AAA SSNR PT 4% cpn A1 (15% CE/3.45 WAL) at 130n, AAA SSNR PT 3.5% cpn A2 (15% CE/3.45 WAL) at 120n, AAA SSNR FCF 3.5% cpn A11(15% CE/2.2 WAL) at 90n, AAA SSNR LCF 4% cpn A13 (15% CE/8.6 WAL) at 145n.

Collateral Performance

Serious delinquencies changed very little across all sectors in September. Prime increased by 9 basis point to 5.86%; Alt-A delinquencies decreased by 9 basis points to 12.83%; Option Arm delinquencies decreased by 6 basis points to 19.53% and Subprime delinquencies decreased by 1 basis points to 24.12%. Roll rates from current status to delinquency continue to be held in at very low levels.

Voluntary prepayments increased across all sectors this month with Subprime prepayments jumping to a level not seen since the third quarter of 2007. Prime CRRs came in at 18.1%, up 305 basis points month-over-month; Alt-A CRRs were 16.0%, up 253 basis points month-over-month; Option Arm CRRs were 9.7%, up 32 basis points month-over-month and Subprime CRRs were 15.7%, up 571 basis points month-over-month. Month-overmonth changes in CDRs all increased. Prime CDRs increased by 20 basis points to 1.38%; Alt-A CDRs increased by 58 basis points to 4.01%; Option Arm CDRs increased by 63 basis points to 4.78% and Subprime CDRs increased by 70 basis points to 6.06%.

Case-Shiller futures indicate a continuation of slow gains in residential home prices, predicting home prices will rise two to three percent annually during the next three years. Year-over-year, home prices are up 5.8% 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 flat at 46% this month. Florida Subprime severities decreased to 67%. New York Subprime severities decreased to 79%; and Nevada Subprime severities decreased to 55%..

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