Mortgage Market Monitor September 2016

Monthly Commentary

Market Update

August ended with a constructive market tone in Non-Agency RMBS which carried over to September and persisted throughout the month. Entering a month filled not only with central bank meetings with the FOMC, ECB, BOJ and BOE all holding policy meetings as well the annual ABS East conference, one might have thought market activity would take a breather. However, that never materialized and daily bid list activity remained relatively consistent as September ended with 5.9bn of supply (vs. 6.5bn the month prior) and dealers net longer by only 176mm. In addition to GSE sellers, which have been the primary source of secondary supply, September also included CDO liquidation lists and hedge funds opportunistically selling into a competitively bid market. The second GSE list of the month, 528mm from 14 bonds, had an unusually high percentage of bonds that did not trade. Four bonds with a total current face of 201mm did not trade, but this wasn't a function of weak bids on these bonds but more aggressive reserve levels from the seller. Demand from money managers and insurance companies continued to be robust at the top of the capital structure in well enhanced and IG rated profiles. Further out the curve in higher beta and more specific collateral stories, hedge funds continued to buy and sell selectively while money managers showed an increasing amount of cautious sponsorship. With another month of improving housing fundamentals and positive technicals, prices ended the month 1-2 points higher.

In settlement news, the RMBS trustees for the Citigroup deals in the 1.125bn Citi R&W Settlement notified bondholders at the end of September that they had received IRS approval. Receipt of the approval letter was the last remaining holdup for the settlement. It’s now expected the 1.125bn settlement payment will be paid to bondholders later this year.

Freddie Mac issued two deals in September. The first, Freddie’s third high LTV deal of the year, 515mm STACR 2016-HQA3, priced at strong levels - 80dm on M1, 135dm on M2, 385dm on M3, 900dm on B. Later in month Freddie priced its fourth low LTV transaction of the year, 739mm STACR 2016-DNA4, tighter than guidance – M1’s at 80dm, M2’s at 130dm, M3’s at 380dm and B’s at 860dm. Caliber issued its second non-prime deal of the year and fourth overall - 198.6mm COLT 2016-2 which was rated by DBRS and Fitch. The A1’s priced at E+125, A2’s at E+175 and M1’s at S+400.

Collateral Performance

Serious delinquencies decreased across all sectors but Prime again in September. Prime delinquencies increased by 2 basis points to 6.53%; Alt-A delinquencies decreased by 7 basis points to 14.57%; Option Arm delinquencies decreased by 20 basis points to 21.73% and Subprime delinquencies decreased by 37 basis points to 26.93%. Roll rates from current status to delinquency are holding stable near sector- level long-term averages.

Voluntary prepayments increased across all sectors this month. Prime CRRs came in at 18.8%, up 533 basis points month-over-month; Alt-A CRRs were 14.2%, up 316 basis points month-over-month; Option Arm CRRs were 8.6%, up 211 basis points month-over-month and Subprime CRRs were 8.4%, up 373 basis points month-over-month. Month-over-month changes in CDRs increased across all sectors. Prime CDRs increased by 12 basis points to 1.56%; Alt-A CDRs increased by 37 basis points to 3.8%; Option Arm CDRs increased by 34 basis points to 4.73% and Subprime CDRs increased by 99 basis points to 5.4%.

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 5.0% across Case-Shiller’s 20 major city index. At the national level, severities declined across all sectors but Alt-A. At the state level, California Subprime severities decreased to 52% this month. Florida Subprime severities increased to 86%. New York Subprime severities decreased to 91%; and Nevada Subprime severities decreased to 70%.

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