Mortgage Market Monitor October 2017

Monthly Commentary

November 16, 2017

Market Update

Following a busy summer in which secondary supply remained relatively steady and elevated, the start of the third quarter saw heightened activity carry over as heavy selling pushed aggregate bid list volume to the highest monthly level in the past two years. October’s calendar filled up right from the beginning as a GSE seller announced a 615mm list during the first week. From there, the GSEs would follow up with two more lists that amounted to 1.3bn. Similarly, other recurrent legacy sellers liquidating their portfolios were also significant sources of supply throughout the month and contributed over 2.8bn. Altogether, volume for October reached close to 9.4bn with Trace reporting 20.6bn in trading. Demand was more than enough to digest the surge in selling as dealers and end accounts alike were aggressively bidding on bonds throughout the capital structure. Just as stock market indices reached higher highs and volatility indices settled into new lows, Non-Agency spreads followed a familiar path of pushing past postcrisis tights with the credit curve continuing to flatten as investors searched for yield.

October received good news on the settlement front where trustees for deals covered under the 4.5bn JP Morgan settlement received the required IRS rulings on REMIC status. The next step is for the trustees to obtain each trust’s allocation from an expert, though there could be further delays until ultimate payment if trustees seek judicial instruction regarding the cash flow waterfall. Meanwhile in the primary market, Freddie Mac issued its sixth transaction of the year, 600mm STACR 2017-HQA3. Similar to STACR 2017-DNA3 issued in September, Freddie excluded from the reference pool all loans in counties that were designated as FEMA disaster areas in the aftermath of Hurricanes Harvey and Irma. The deal was upsized and priced tighter than guidance – M1 at 55dm, M2 at 235dm, and B1 at 445dm.

Collateral Performance

Serious delinquencies increased slightly across all sectors in October. Prime increased by 2 basis point to 5.81%; Alt-A delinquencies increased by 4 basis points to 12.81%; Option Arm delinquencies increased by 5 basis points to 19.59% and Subprime delinquencies increased by 21 basis points to 24.33%. Roll rates from current status to delinquency continue to be held in at very low levels.

Voluntary prepayments decreased across all sectors this month. Prime CRRs came in at 14.1%, down 394 basis points month-over-month; Alt-A CRRs were 12.9%, down 303 basis points month-over-month; Option Arm CRRs were 8.5%, down 117 basis points month-over-month and Subprime CRRs were 9.5%, down 614 basis points month-over-month. Month-over-month changes in CDRs all decreased. Prime CDRs decreased by 13 basis points to 1.28%; Alt-A CDRs decreased by 64 basis points to 3.43%; Option Arm CDRs decreased by 59 basis points to 4.24% and Subprime CDRs decreased by 155 basis points to 4.56%.

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 5.9% 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 52% this month. Florida Subprime severities increased to 72%. New York Subprime severities increased to 90%; and Nevada Subprime severities increased to 73%.

Media Attachments

This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. The information contained herein may include preliminary information and/or "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any forward-looking statements or opinions in this document. Any opinions expressed herein are current only as of the time made and are subject to change without notice. Past performance is no guarantee of future results. © 2019 TCW