Mortgage Market Monitor October 2016

Monthly Commentary

November 15, 2016

Market Update

For a month that has typically been active with investors trying to get ahead of the holiday season and year-end, October of this year was rather subdued as secondary volumes were muted throughout the month and dipped below September’s level of 6.5bn (including both legacy RMBS and credit risk transfer bonds). Total volume ended just shy of 5.9bn, breaking the streak of three consecutive months with 6.4+bn. During the first week, bid list activity seemed like it would at least keep pace. A 461mm list from a GSE seller, which consisted mostly of subprime collateral, attracted strong retail participation and helped push weekly supply to 1.7bn. However, that would be the one and only appearance from a GSE during the month. Without additional sources of meaningful bid lists, the Non-Agency market slipped into a steady pattern of flat to slightly tighter spreads on range bound volumes that averaged 1.4bn over the last three weeks. Even as broader markets exhibited bouts of volatility and weakness, demand for both short and longer duration profiles remained steady with real money accounts once again leading the way.

In the primary market, the list of non-prime issuers grew by one with a newcomer in the space. SG Capital Partners came out with their inaugural securitization late in October. Only the super senior tranche was made available to investors and 86.5mm priced at a yield of 3.75%. Credit risk transfer also had a new deal during the month. Freddie Mac’s 478mm STACR 2016-HQA4 priced around guidance - M1 at 80dm, M2 at 130dm, M3 at 390dm, and B at 875dm. While this was Freddie’s eighth and final transaction of the year, Fannie Mae is expected to issue three more before year end.

Collateral Performance

Serious delinquencies decreased across all sectors but Prime again in October. Prime delinquencies were flat at 6.46%; Alt-A delinquencies decreased by 5 basis points to 14.33%; Option Arm delinquencies decreased by 16 basis points to 21.57% and Subprime delinquencies decreased by 21 basis points to 26.72%. Roll rates from current status to delinquency are holding stable near sector- level long-term averages.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 19.0%, up 18 basis points month-over-month; Alt-A CRRs were 14.1%, down 20 basis points month-over-month; Option Arm CRRs were 7.0%, down 149 basis points month-over-month and Subprime CRRs were 11.1%, up 270 basis points month-over-month. Month-over-month changes in CDRs declined across all sectors but Prime. Prime CDRs increased by 6 basis points to 1.63%; Alt-A CDRs decreased by 44 basis points to 3.32%; Option Arm CDRs decreased by 71 basis points to 4.19% and Subprime CDRs decreased by 46 basis points to 4.99%.

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 increased across all sectors but Subprime. At the state level, California Subprime severities increased to 52% this month. Florida Subprime severities decreased to 85%. New York Subprime severities decreased to 88%; and Nevada Subprime severities decreased to 67%.

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