Mortgage Market Monitor November 2018

Monthly Commentary

Market Update

Much like October, November was a difficult month for Non-Agencies along with broader risk assets. The cautious risk sentiment from October spilled over to November, continuing to push spreads wider and negatively impacting liquidity. Large intraday swings in equity indices coupled with weakness in HY for most of the month did little to change investors’ cautious approach across Non-Agency subsectors. Similar to October, bonds on bid lists were thinly bid from end accounts while dealers were no longer aggressive bidders. Dealers, who themselves have added 2bn of risk since September, lowered offers in attempt to lighten up on risk given the volatility and approaching year-end. The trading landscape throughout November continued to be challenging with overall liquidity thin and bid-ask spreads moving wider. Also, the percentage of bonds that did not trade (DNT) off lists remained elevated as sellers mostly chose to not sell into weaker levels. Monthly secondary supply was relatively unchanged MoM at 6.3bn and Trace report 11.29bn of total trading volume. Dealers were net sellers by 164mm leaving legacy Non-Agency RMBS spreads wider by 20-30 bps, CRT M2s 20-35 bps wider and CRT B1s 25-35 bps wider.

Collateral Performance

Serious delinquencies declined across all sectors in November. Prime decreased by 3 basis point to 3.83%; Alt-A delinquencies decreased by 17 basis points to 9.67%; Option Arm delinquencies decreased by 31 basis points to 17.03% and Subprime delinquencies decreased by 39 basis points to 20.37%.

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 1 bp to 14.60%, Alt-A delinquencies declined 189 basis points to 31.03% and Subprime delinquencies decreased 233 bps to 37.12%.

Voluntary prepayments were mixed across sectors this month. Prime CRRs came in at 12.4%, up 88 basis points month-over-month; Alt-A CRRs were 12.7%, up 114 basis points month-over-month; Option Arm CRRs were 10.1%, up 166 basis points month-over-month and Subprime CRRs were 7.5%, down 66 basis points month-over-month. Month-over-month CDRs were also mixed across all sectors. Prime CDRs decreased by 11 basis points to 0.93%; Alt-A CDRs increased by 46 basis points to 2.96%; Option Arm CDRs increased by 3 basis points to 4.42%, and Subprime CDRs increased by 113 basis points to 5.29%.

Case-Shiller futures indicate a continuation of slow gains in residential home prices, predicting home prices will rise three quarters of a 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, changes in severities were mixed across all sectors. At the state level, California Subprime severities were lower at 46% this month. Florida Subprime severities increased to 78%. New York Subprime severities were decreased to 76%; and Nevada Subprime severities decreased to 80%.

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