Mortgage Market Monitor November 2017

Monthly Commentary

Market Update

With many of the core themes persisting in the non-agency market, November initially felt very much like a continuation of October. Hurricane related concerns continued to dissipate as the market was now more comfortable with expectations for delinquencies and cum losses. Also, elevated bid list selling from legacy sellers carried over into the first half of November and bonds traded well with aggressive bidding from money managers and dealers. However, as volatility and spread widening in the broader credit markets carried on throughout the first half of the month, along with dealers now net longer by 1.3bn since the start of the quarter, spreads in legacy RMBS began to come under pressure. The market began to tier between up in quality profiles and higher beta/off the run names which started to trade weaker than trade prints in the past few months. Although some of the higher beta profiles traded lower in sympathy with the broader credit markets, the overall tone in legacy RMBS remained constructive. Investors still find the non-agency RMBS sector as relatively attractive because of the strong underlying housing fundamentals and because yields still fully incorporate pessimistic default and prepayment assumptions. November ended with spreads unchanged to 15 bps wider on 16.5bn of Trace reported volume, 7.2bn of secondary supply and dealers net longer by 510mm.

The first credit risk transfer remits that would contain hurricane related delinquencies were released at the end of November. Remits reported CRT delinquencies increased by 9-38 bps in low LTV deals and 15-55 bps in high LTV deals as a result of the impact of the two hurricanes in September. Focus will continue to be on delinquencies and roll rates in the coming months to paint a clearer picture of the hurricane impact, but for now the data seems to be in line with market expectations.

Fannie priced its seventh and final transaction of the year, 1.16bn CAS 2017-C07, which featured both a low and high LTV group and priced tighter than guidance. For the low LTV group 1 - 1M1 (BBB-/BBB+, 3.05% CE, 2.06 WAL) at 65dm, 1M2 (B/BB-, 1% CE, 6.66 WAL) at 240dm and 1B1 (NR, .5% CE, 10.01 WAL) at 400dm. For the high LTV group 2 - 2M1 (BBB-/BBB, 3.40% CE, 1.42 WAL) at 65dm, 2M2 (B/B, 1% CE, 6.1 WAL) at 280dm and 2B1 (NR, .5% CE, 10.01 WAL) at 445dm. Ellington priced its first non-QM deal, 138.5mm EFMT 2017-1, in line with guidance - AAA rated A1 (31% CE/2.1 WAL) at 75n/2.6% yield, AA rated A2 (22% CE/2.1 WAL) at 80n/2.66% yield, A rated A3 (10% CE/2 WAL) at 90n/2.76% yield, BBB rated M1 (5% CE/4 WAL) at 200n/4% yield, and BB rated B1 (1.9% CE/4 WAL) at 310n/5.1% yield.

Collateral Performance

Serious delinquencies increased slightly across all sectors in November. Prime increased by 12 basis point to 5.80%; Alt-A delinquencies increased by 12 basis points to 12.75%; Option Arm delinquencies increased by 17 basis points to 19.75% and Subprime delinquencies increased by 36 basis points to 24.77%. Roll rates from current status to delinquency continue to be held in at very low levels.

Voluntary prepayments increased across all sectors this month. Prime CRRs came in at 16.9%, up 295 basis points month-over-month; Alt-A CRRs were 15.1%, up 227 basis points month-over-month; Option Arm CRRs were 9.3%, up 83 basis points month-over-month and Subprime CRRs were 14.1%, up 417 basis points month-over-month. Month-over-month changes in CDRs were mixed. Prime CDRs increased by 16 basis points to 1.45%; Alt-A CDRs decreased by 16 basis points to 3.28%; Option Arm CDRs increased by 13 basis points to 4.38% and Subprime CDRs increased by 98 basis points to 5.60%.

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 6.2% 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 45% this month. Florida Subprime severities increased to 75%. New York Subprime severities decreased to 84%; and Nevada Subprime severities decreased to 61%.

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