Mortgage Market Monitor September 2018

Monthly Commentary

Market Update

After a slow summer month in August, trading activity picked up across RMBS subsectors throughout September. Along with the increase in volumes, rates steadily sold off throughout September as the UST 10yr ended at 3.06% from 2.86% and the UST 30yr at 3.21% from 3.02%. Regular selling from money managers continued along with legacy holders as a bank sold 1.8+bn out of their portfolio on a bid list late in the month. It was a long time since the market had seen a day with over 2bn of legacy RMBS supply (3 years to be exact on 9/21/15), and the day of this list came very close with a total of 1.96bn. The 1.8+bn bank list saw a good depth of bids from a wide range of accounts and left dealers 420mm longer on the day. After a quiet summer, dealers were aggressive bidders throughout September and ended the month net buyers of 1bn. Despite spreads being well through post-crisis tights, investors still maintain a constructive view on the seasoned legacy RMBS sector due to the negative net supply, loss adjusted yields and supportive housing fundamentals. Seven legacy RMBS deals were redeemed mostly from the 2004 vintage, bringing the YTD balance of deals called to 2.4bn. September ended with 12.78bn of Trace reported volume on 6.9bn of bid list supply, leaving spreads unchanged across RMBS subsectors. In CRT, Hurricane Florence was quickly upgraded to a category 4 hurricane with 141 mph winds as it impacted the East Coast. Unlike hurricanes in the past, CRT spreads were unchanged and the market didn’t price in a concession for potential damage. The market had little concern given houses in the Carolinas were better built to withstand extreme weather conditions, as well as the relief that the GSEs showed that they are willing to provide to borrowers in the aftermath of Hurricanes Harvey and Irma.

Collateral Performance

Serious delinquencies decreased across all sectors in September. Prime decreased by 8 basis point to 4.04%; Alt-A delinquencies decreased by 14 basis points to 10.06%; Option Arm delinquencies decreased by 33 basis points to 17.36% and Subprime delinquencies decreased by 29 basis points to 20.51%.

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 130 bps to 16.45%, Alt-A delinquencies declined 193 basis points to 33.51% and Subprime delinquencies declined 187 bps to 39.42%.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 13.0%, up 1 basis point month-over-month; Alt-A CRRs were 12.9%, down 99 basis points month-over-month; Option Arm CRRs were 10.0%, down 44 basis points month-over-month and Subprime CRRs were 6.8%, down 48 basis points month-over-month. Month-over-month CDRs were also mixed across sectors. Prime CDRs decreased by 18 basis points to 1.20%; Alt-A CDRs were flat at 3.10%; Option Arm CDRs increased by 10 basis points to 4.65%, and Subprime CDRs decreased by 26 basis points to 4.26%.

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 5.9% 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 higher at 53% this month. Florida Subprime severities decreased to 84%. New York Subprime severities were flat at 84%; and Nevada Subprime severities decreased to 68%.

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