Mortgage Market Monitor September 2019

Monthly Commentary


Market Update

In September Non-Agency RMBS, along with broader risk assets, proved resilient in a market landscape of heightened global risks - global economic data weakened, repo funding rates spiked, Iran attacked Saudi Arabia’s oil infrastructure and trade tension continued. As widely expected, the FOMC reduced interest rates by 25 bps in September but also the ECB cut interest rates by 10 bps and restarted QE. The S&P 500 gained 1.7% while the UST 10yr saw elevated price volatility - yields started the month at a 1.49%, moved to 1.89% mid-month and then rallied to 1.66%. In Non-Agency RMBS, September felt like summer was finally behind us as secondary trading activity increased and the primary market remained active. September started off with a Category 5 Hurricane, Hurricane Dorian, making its way towards the US. RMBS investors kept a watchful eye on Hurricane Dorian’s path and its potential impact on certain subsectors, particularly credit risk transfer and non-QM deals with high exposure to Florida. The hurricane ended up being a non-event as spreads didn’t move wide nor did delinquency and loss expectations increase. A highlight list of September was a 767mm/14 line item mostly subprime list coming from a REIT. It was interesting timing for a list of this size with quarter end limits potentially handcuffing how aggressively dealers could bid, but the list was well bid from both dealers and money managers and traded in line with expectations.

Overall CRT demand remained robust, especially down the stack from real money investors in search of yield. With trading volume in B1s up over the month, the differential between M2 and B1 spreads hit all-time tights: 116 B1/M2 HTLV and 96 B1/M2 LLTV. Rates backing up was supportive for seasoned CRT as higher premium 2015-2017 vintage bonds traded with prices that exhibited slower implied prepayment speeds. Overall trading activity increased to 9.8bn as reported by Trace on 4.4bn of BWIC supply. Dealers were 113mm shorter in September, leaving spreads unchanged in legacy RMBS and at the top of the CRT capital structure while CRT B1s were 10 bps tighter. Most market participants attended the annual ABS East conference in September, where the overall tone of the conference was neutral on residential credit. Very few investors seemed to be bullish in any particular sector/part of the capital stack at this point given the rally we’ve seen across the board YTD. Most investors seemed to think that HPA, while decelerating, would still be favorable, particularly given the rate rally. The most consistent concern was people starting to worry what STACR/CAS reference pools would look like in six months and what would be the spread/duration on those without the benefit of high GWAC/fast prepayments. So far this year in STACR/CAS, we’ve seen collateral pools from late 2018 to early 2019 that have WACs in the M4%-H4%. Fast forward six month from now, we’ll likely be looking at new issues with mortgages that are from March 2019 to today which are in the M3%-L4% area.

The primary market in RMBS slowed in September with issuance only hitting 5.8bn as a holiday weekend and the ABS East conference slowed new issue activity. Like in previous months, non-QM continued to be the busiest primary market in terms of deals and volume. FirstKey/Cerberus issued their first standalone manufactured housing securitization, TPMT 2019-MH1, which was the largest post-crisis manufactured housing securitization. The collateral pool consisted of 21 year seasoned, 7.94% WAC loans and 100% of the pool was OTS Current. A more comprehensive list of the deals issued in September is below:.

Non-QM/Expanded Prime

  •  380mm NRZT 2019-NQM4: AAA rated A1 (27.35% CE/2.75 WAL) 95/n, AA rated A2 (20.50% CE/2.75 WAL) 110/n, A rated A3 (11.05% CE/2.75 WAL) 125/n, BBB rated M1 (7.25% CE/5.11 WAL) 155/n, BB rated B1 (3.75% CE/5.11 WAL) 230/n, B rated B2 (1.90% CE/5.11 WAL) 5.12% yield
  • 360mm SEMT 2019-CH3: AAA rated 4% PT A1 (15.00% CE/3.47 WAL) 170/n, AAA rated 4% FCF A10 (15.00% CE/2.19 WAL) 155/n, AAA rated 4% LCF A13 (15.00% CE/8.59 WAL) 185/n, Aa1/AAA rated SNR MEZZ A19 (10.00% CE/3.47 WAL) 175/n
  • GCAT 2019-NQM2: AAA rated A1 (26.30% CE/2.07 WAL) 110/n, AA rated A2 (19.55% CE/2.07 WAL) 130/n, A rated A3 (10.25% CE/2.07 WAL) 140/n, BBB rated M1 (5.90% CE/2.99 WAL) 165/n, BB rated B1 (3.05% CE/2.99 WAL) 235/n
  • 353mm COLT 2019-4 from Caliber: AAA rated A1 (26.15% CE/2.17 WAL) 90/n, AA rated A2 (19.45% CE/2.17 WAL) 115/n, A rated A3 (10.20% CE/2.17 WAL) 130/n

Primo Jumbo

  • 548.9mm WFMBS 2019-3: AAA rated 3.5% PT A1 (15.00% CE/4.98 WAL) 1-02 bk UMBS3.5, AAA rated 3% FCF A4 (15.00% CE/2.81 WAL) 1- 20 bk DW3.0, AAA rated 3% LCF A6 (15.00% CE/11.50 WAL) 145/n, Aa1/AAA rated SNR MEZZ A17 (5.00% CE/4.98 WAL) 1-16 bk UMBS3.5
  • JPMMT 2019-7: AAA rated 3.5% PT A3 (12.00% CE/4.89 WAL) 1-00bk Oct UMBS3.5, AAA rated 3.5% FCF A4 (12.00% CE/2.77 WAL) 2-12bk Oct DW3.5, AAA rated 3.5% LCF A5 (12.00% CE/11.28 WAL) 150/n, AAA rated L+90 A11 (12.00% CE/4.89 WAL) 90dm, Aa2/AAA rated SNR MEZZ A15 (6.00% CE/4.89 WAL) 1-14bk Oct UMBS3.5

Re-performing/Non-performing

  • 320mm PRET 2019-NPL3: unrated A1 (37.60% CE/1.23 WAL) 3.125% yield, unrated A2 (26.98% CE/2.68 WAL) 4.625% yield
  • 787mm VOLT 2019-NPL6: A1A (43.31% CE/1.55 WAL) 3.25% yield, A1B (32.13% CE/3.02 WAL) 4.125% yield, A2 (25.77% CE/3.02 WAL) 5.125% yield

Credit Risk Transfer

  • 626mm STACR 2019-HQA3: BBB-/BBB rated M1 (3.50% CE/1.45 WAL) 75dm, B+ rated M2 (1.50% CE/5.40 WAL) 185dm, unrated B1 (0.60% CE/9.92 WAL) 300dm, unrated B2 (0.10% CE/10.00 WAL) 750dm

Manufactured Housing

  • 508mm TPMT 2019-MH1: AAA rated A1 (37.70% CE/1.90 WAL) 90/e, AA+/AA rated A2 (31.40% CE/4.47 WAL) 120/n, AA/A rated M1 (25.70% CE/5.03 WAL) 140/n

Fix and Flip

  • 340mm TRK 2019-2 A1: unrated A1 (20.00% CE/2.40 WAL) 3.75% yield, unrated A2 (10.00% CE/2.69 WAL) 4.25% yield
Investor
  • 484mm JPMMT 2019-INV2: AAA rated 3.5% A3 (20.00% CE/4.64 WAL) 160/n, AAA rated L+90 A11 (20.00% CE/4.64 WAL) 95dm, AA+/AAA rated SNR SUPP (12.00% CE/4.64 WAL) 170/n
  • 353mm CIM 2019-INV3: AAA rated 3.5% A3 (20.00% CE/4.71 WAL) 155/n, AAA rated L+95 (20.00% CE/4.71 WAL) 100dm, Aa1/AAA rated SNR SUPP A15 (10.00% CE/4.71 WAL) 170/n, Aa3/AA rated SUB B1A (8.90% CE/10.47 WAL) 185/n

Collateral Performance

The percentage of serious delinquent legacy loans declined across sectors in September. Prime delinquencies decreased by 1 basis point to 3.16%; Alt-A delinquencies decreased by 2 basis points to 7.93%; Option Arm delinquencies decreased by 17 basis points to 15.30% and Subprime delinquencies decreased by 3 basis points to 18.19%.

In non-qm mortgages, serious delinquencies rose across sectors in September. Prime non-qm delinquencies increased by 7 basis points to 0.18%; Alt-A non-qm delinquencies rose 19 basis points to 1.08%; and Subprime non-qm delinquencies increased 23 basis points to 0.23%.

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 61 basis points to 9.75%, Alt-A delinquencies increased 2 basis points to 22.19% and Subprime delinquencies increased 40 bps to 36.13%.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 23.7%, up 391 basis points month-over-month; Alt-A CRRs were 21.9%, up 564 basis points month-over-month; Option Arm CRRs were 10.0%, down 30 basis points month-over-month and Subprime CRRs were 9.1%, up 159 basis points month-over-month. Month-over-month CDRs were also mixed across sectors. Prime CDRs increased by 56 basis points to 1.55%; Alt-A CDRs increased by 85 basis points to 3.60%; Option Arm CDRs increased by 36 basis points to 4.72%, and Subprime CDRs decreased by 44 basis points to 4.02%.

Case-Shiller futures predict home prices will increase 1.0% annually during the next three years. Year-over-year, home prices are up 2.0% 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 lower at 46% this month. Florida Subprime severities were higher at 85%. New York Subprime severities increased to 78%; and Nevada Subprime severities increased to 88%.

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