Mortgage Market Monitor November 2016

Monthly Commentary


Market Update

It truly was a November to remember. Not just politically, but also the market’s reaction to a Donald Trump victory in the U.S. Presidential Election. When Trump announced his candidacy for president on June 16, 2015, few gave him a chance to win the Republican nomination, let alone the presidency. With the likelihood of a Trump victory only at ~20%, the market priced in a Clinton victory and a new administration that would have similar policies to Obama’s. Rather, as election night went on, it became clear that the pre-election polls were wrong and that Americans had picked Donald Trump as the next President of the United States. With the Republican sweep of the White House, Senate and House, Trump now would have a much easier path to achieve his plan of unifying, spending and expansionary fiscal policy.

The market's reaction was immediate. The following day, U.S. Treasuries started a steep selloff while global risk assets rallied, both of which would continue for the remainder of November. Over the month, 10yr UST yields went from 1.83% to 2.38%, 30yr UST yields from 2.58% to 3.03%, all the while the S&P 500 and DJIA indices set all-time highs at 2,213 and 19,152, respectively. Within Non-Agency RMBS, the market’s initial response was very similar to that of the Brexit vote – bid/ask markets were framed wider and very little actually transacted. With market participants needing some time to digest Trump’s victory and what a steeper yield curve meant for the sector, trading volumes were almost non-existent during the second half of the election week and the 431mm of supply was the second lowest weekly total for the year. The market tone remained firm post-election with expectations that some de-regulation should be in play which could allow for less stringent lending standards and higher voluntary prepayments. The following Tuesday was the first day of substantial trading since the election and with larger sizes of locked out longer duration subprime bonds out for bid, it was the first test of market levels and investor interest. The 1.1bn of volume was well absorbed and the longer duration subprime bonds, which was a profile that was expected to soften the most given the move in rates, traded to pre-election, pre-rate move levels. This execution showed there was still strong demand for longer duration profiles within the sector and that yield buyers, who with a forward rate curve shifted higher, could now achieve their yield-bogeys and had returned to the sector.

A highlight list from November was a 280mm liquidation of mostly subprime bonds from an overseas seller. The list was broken into two pools – pool 1 consisted of 193mm of split IG/well enhanced profiles and pool 2 was 87mm of more generic subprime bonds. Pool 1 saw strong interest from real money accounts and traded on an all-or-none basis to one end-account and group 2 traded on a line item basis. With a continuing backdrop of improving housing fundamentals and positive technicals, Non-Agency RMBS prices ended November unchanged on 5.7bn of supply.

In settlement news, some of the Citigroup RMBS deals in the 1.125bn Citi R&W settlement received their settlement payment in November’s remits. A majority of these deals were Alt-A and Prime and it’s likely that the Subprime deals will be paid in December. Also, Fannie priced its sixth transaction of this year, 1.024bn CAS 2016-C06, in line with guidance – 1M1 at 130dm, 1M2 at 425dm and 1B at 925dm.

Collateral Performance

Changes in serious delinquencies were mixed across all sectors in October. Prime increased by 7 basis points to 6.53%; Alt-A delinquencies increased by 1 basis point to 14.30%; Option Arm delinquencies decreased by 19 basis points to 21.38% and Subprime delinquencies decreased by 1 basis point to 26.63%. 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 18.7%, down 57 basis points month-over-month; Alt-A CRRs were 15.6%, up 78 basis points month-over-month; Option Arm CRRs were 9.2%, up 228 basis points month-over-month and Subprime CRRs were 9.3%, down 215 basis points month-over-month. Month-over-month changes in CDRs were also mixed across sectors. Prime CDRs decreased by 26 basis points to 1.37%; Alt-A CDRs increased by 9 basis points to 3.45%; Option Arm CDRs increased by 101 basis points to 5.24% and Subprime CDRs decreased by 17 basis points to 4.85%.

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 5.1% across Case-Shiller’s 20 major city index. At the national level, severities increased among Subprime and Alt-A loans and decreased among Option Arm and Prime loans. At the state level, California Subprime severities increased to 52% this month. Florida Subprime severities decreased to 85%. New York Subprime severities increased to 95%; and Nevada Subprime severities increased to 71%.

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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. © 2018 TCW