Mortgage Market Monitor October 2018

Monthly Commentary

November 21, 2018

Market Update

October lived up to its reputation as a difficult month for risk assets and gave investors plenty of frights and bitter treats this year. During the first half of the month, Hurricane Michael became the first Category 4 storm on record to make landfall in the Florida Panhandle. Although the effects were contained in Non-Agency RMBS, the power of the storm wreaked havoc and caused devastating damage across several states. Meanwhile, the financial markets also started to experience disruptions. Even Treasuries, which traditionally have been safe haven investments, began to sell-off. Non-Agency spreads managed to hold firm initially, but continued elevated levels of volatility and downward price pressures across broader markets became more acute as the month progressed. Non-Agency buyers became less aggressive whereas sellers’ expectations remained steady, leading to wider bid-ask spreads and progressively higher number of bonds not trading from bid lists. For bonds that did exchange hands, it seemed a disproportionate amount went to dealers as they added another 768mm to their balance sheets for a total of 1.8bn since the start of September. Total secondary supply for October amounted to 6.9bn and established a new high for the year. Trading according to Trace volumes was also active and reached close to 17bn where flows were orderly without any distressed selling. While very much dependent on individual bond profiles, clearing levels were generally ½ to 2 points down month-over-month. For the legacy RMBS market specifically, the underlying fundamentals remain strong despite higher mortgage rates while the technical landscape continues to be supportive at least for the moment.

October had a very busy primary calendar with a range of deals coming to market. A few highlight issuances include Wells Fargo’s first post-crisis Non-Agency transaction, 441mm WFMBS 2018-1. Wells joined JPMorgan as the only other large pre-crisis lender to re-enter the market and priced the AAA rated super senior passthrough with 3.5% coupon 1-12 back of FNCL3.5. Other firsts during the month include New Residential’s inaugural Non- QM securitization, 311mm NRZT 2018-NQM1, and Fannie Mae’s inaugural Credit Risk Transfer transaction structured as a REMIC (real estate mortgage investment conduit), 922mm CAS 2018-R07. The AAA rated super senior A1 from NRZT 2018-NQM1 priced at 75/n and the 1M1, 1M2, and 1B1 off of CAS 2018-R07 came out at 75dm, 240dm, and 435dm, respectively.

Collateral Performance

Changes in serious delinquencies were mixed across all sectors in October. Prime decreased by 2 basis point to 3.95%; Alt-A delinquencies increased by 2 basis points to 9.95%; Option Arm delinquencies decreased by 3 basis points to 17.34% and Subprime delinquencies increased by 21 basis points to 20.76%.

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. Prime delinquencies declined 184 bps to 14.61%, Alt-A delinquencies declined 59 basis points to 32.92% and Subprime delinquencies increased 3 bps to 39.45%.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 11.5%, down 140 basis points month-over-month; Alt-A CRRs were 11.6%, down 127 basis points month-over-month; Option Arm CRRs were 8.4%, down 155 basis points month-over-month and Subprime CRRs were 8.1%, up 137 basis points month-over-month. Month-over-month CDRs were down across all sectors. Prime CDRs decreased by 20 basis points to 1.03%; Alt-A CDRs decreased by 127 basis points to 2.44%; Option Arm CDRs decreased by 33 basis points to 4.38%, and Subprime CDRs decreased by 21 basis points to 4.10%.

Case-Shiller futures indicate a continuation of slow gains in residential home prices, predicting home prices will rise one percent annually during the next four years. Year-over-year, home prices are up 5.5% 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 lower at 48% this month. Florida Subprime severities decreased to 73%. New York Subprime severities were flat at 83%; and Nevada Subprime severities jumped to 93%.

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