MBS Weekly Market Commentary Week Ending 11/15/19

Treasuries rebounded last week, as the longer end of the yield curve recovered some of the ground lost earlier in the month.  The yield on the 10-year note declined about 11 basis points on the week, closing at 1.83%, while the 5-year yield dropped by just under 10 bps.  The rally in long Treasuries primarily reflected a re-assessment by traders of potential future inflation risks, as the 10-year TIPS break-even declined by 9 basis points.

 
 

*The MBS Weekly Market Profile Report corresponds to the commentary below.*

The yield curve flattened a bit over the week, although all maturity spreads remained in positive territory. The closely-watched 2-10 year spread narrowed by about 4.5 basis points to +22 bps, and while the 2-5 year spread narrowed by 3 basis points, it remained positive at just inside 4 bps. Realized Treasury volatility continued to trend lower; the 40-day standard deviation for the 10-year note has declined from around 6 basis points at the end of September to around 4.7 basis points on Friday.

MBS modestly lagged the Treasury rally. The 30-year conventional current coupon spread over Treasuries widened by a couple of basis points, while 30-year UMBS lagged their 10-year hedge ratios by 2-4 ticks over the last five sessions. The 30-year Ginnie current coupon widened by 3 basis points, although the performance was somewhat spotty, with Ginnie II 3s actually outperforming the 10-year note (duration-neutral) by 1/32 while the rest of the tradable coupon stack lagged by 1-3 ticks. Coupon swaps compressed a bit on the week with the exception of the GNII 3/2.5 swap, which improved by 6/32s. UM30 and UM15 dollar rolls are trading at or behind their breakeven levels, while Ginnie II rolls are behaving fairly normally; notably, the GNII 2.5 Nov/Dec roll is, at this writing, offered at 2+ after being offered as high as 8+ early last week.

I attended the first non-QM (“qualified mortgage”) conference sponsored by Information Management Network (IMN) last week in Los Angeles. The sector represents loans underwritten to guidelines that don’t allow for them to receive a “safe harbor” from lawsuits alleging non-compliance with the Ability to Repay provisions of the Dodd-Frank act. While many topics were addressed over the two-day conference, there were a few important take-away points.

  • The sector is growing rapidly and beginning to dominate non-agency MBS issuance.  Standard & Poor’s is projecting issuance of around $25 billion for all of 2019, up from around $13 billion issued in 2018.
  • Future issuance volumes in the sector will be heavily influenced by what the CFPB does with the non-QM “patch.”  This provision allows loans with debt-to-income (DTI) ratios greater than 43% to be purchased or securitized in MBS issued by Fannie or Freddie if other mitigating factors are present in a loan application.  The patch is scheduled to expire at the beginning of 2021.  The patch may be 1) allowed to expire, 2) modified, or 3) extended.   Much of this issuance could be forced into non-agency securities if the patch is simply allowed to expire; at the conference, it was estimated that total annual issuance could reach $200 billion in this scenario.
  • Loans in the sector are currently being underwritten conservatively, with relatively high FICO scores accompanied by low LTVs.  However, concerns were expressed of a potential “race to the bottom” as more entrants enter the sector and compete for volumes by relaxing underwriting standards.  Nonetheless, it’s clear that the rating agencies are currently using very conservative criteria to evaluate and rate transactions, with credit support levels double or triple that of subprime transactions issued prior to the financial crisis.  Moreover, increased competition is also expected to reduce rates associated with the product and make pricing more uniform across the industry.
 

 

About the Author: Bill Berliner

As Director of Analytics, Bill Berliner is tasked with developing new products and services, enhancing existing solutions, and helping to expand MCT’s footprint as the preeminent industry-leader in secondary marketing capabilities for lenders.

Mr. Berliner boasts more than 30 years of experience in a variety of areas within secondary marketing. He is a seasoned financial professional with extensive knowledge working with fixed income trading and structuring, research and analysis, risk management, and esoteric asset valuation.

Mr. Berliner has also written extensively on mortgages, MBS, and the capital markets. He is the co-author, with Frank Fabozzi and Anand Bhattacharya, of Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques, which was named one of the top ten finance texts in 2007 by RiskBooks. He wrote and edited chapters for The Handbook of Mortgage-Backed Securities, The Handbook of Fixed-Income Securities, Securities Finance, and The Encyclopedia of Financial Models. In addition, Mr. Berliner co-authored papers published in The Journal of Structured Finance and American Securitization. He also wrote the monthly “In My View” column for Asset Securitization Report from 2008-2012.