Market Environment Update:
The first quarter of 2020 has been trying for the mortgage market. Rates started the quarter at the highest levels we have seen in some time, followed by a steady drop during January and February, leading into March when concerns of Covid19 were dominating headlines. As March progressed, and the nation went into lockdown, rates dropped off sharply. Overall, we observed the 10 year treasury rate move from 1.919% on 12/31 to a low point of 0.543% on 3/9/20 before finally rebounding slightly to 0.67% on 3/31 or a 1.249% drop during the quarter. However, during the quarter, mortgage rates did not follow as closely with the Bank Rate 30Yr index actually ending the quarter at the same place it was at the start of the quarter of 3.86%. Freddie Mac’s survey rate showed slightly more movement beginning the quarter at 3.74% and ending the quarter at 3.50%, but a much tighter range than treasury rates for the period. Additionally we continued to see an inversion in the yield curve with our average spread between 3 month and 10 year yields at -15bps for the period. Lower interest rates did drive up the MBA refi index during the quarter with the index reaching a peak just prior to the Covid concerns during the week of March 5th of 6418.9 up from 1713.7 at the start of the quarter (a 275% increase). The purchase index reached its peak of 313.7 during the week of January 24th up from 263.2 at the start of the quarter or a 19% increase before purchase volume began to slow slightly at the end of the quarter actually ending up down 20% overall.
For short term rates which typically impact float earnings and advance costs, we observed a sharp drop in rates at the start of the quarter with rates moving from 1.908% to a low of .7405% on 3/12, before rebounding to end the quarter back up at 1.4505%.
GNMA Par Rate and Implied Service Fees:
Below is a graph of the average 30 year government par rate and implied service fee since 2019. There had been a steady decline in the par rate throughout 2019 year with a spike in net service fee during the summer months. The widening of implied service fees coupled with compressed inter-coupon spreads that favored the 69 strip over the 19 aligns with the higher service fees observed in co-issue deliveries and new production valuations. The average net service fee and Government par started to increase in Q1 as the primary/secondary spread continued to widen. Additionally, higher potential delinquencies disproportionally hit 19 service fee values that helped raise the average net service fee through the creation of more 69 service fee strips.
IMA Risk Analytics for Q1 2020 – Review of Interest Rate, Volatility, and Mortgage Spread:
In our quarterly review, we assess the 10-year change to measure curve shift and the relative level. The curve shifted down on quarterly basis, with short end touching close to zero and a steeper interest rate environment. We saw decreases in MSR values as the curve shifted down, the steepness of the curve helped maintain hedge carry.
IMA reviews the curve slope to assess flattening and steeping trends. At the end of the quarter, we saw a steepening of the curve.
We review changes in the short, mid and long-term maturities, which makes up the degree of curvature. Quarterly, the long tenors saw larger increases, resulting in a steepening of the curve. MSR portfolios typically have most of their exposure on the long end of the curve and this increase in yields resulted in quarterly increases in values.
Volatility: Volatility decreased in the short tenor of the surface, while the long tenors saw increasing volatility. With several MSR portfolios having high note rates relative to the par rates we saw these “in the money” portfolios exhibit positive vegas profiles. The volatility decreasing in the short end had a negative impact on the MSR values with positive vega profiles.
MSR Market Trades:
IMA brokered / tracked nine trades for Q4 2019. Market activity increased significantly over the prior two quarters led by a combination of sellers having written down their portfolio, and increased demand due to lack of product being made available to the market. Co-Issue activity has also picked up in this market as many sellers see their current production as a means to generating cash while they continue to wait for the bulk pricing to increase.
The tombstones below provide details of the trades IMA observed during the quarter:
Market Trade Feedback:
Multiples for current par note rate product, recent vintages 30 year conventional MSR’s are at a 4.25x to 4.5x. Multiples for current par rate, recent vintage 30 year governments are at 3.0 to 3.25. Different geographies may adjust this multiple +/- 0.5x. For trades at above current market levels, expect the trades to be 1.00x-2.00x below above levels depending upon actual note rates.
Effective Multiples (Net Multiples) – multiples may net down by .10 to .25 of a multiple because of terms in the LOI or loan exclusions.
Conventional Yields – purchaser unlevered yields for conventional are currently 9.5% to 11% depending on the characteristics of the portfolio.
Government Yields – purchaser unlevered yields for government are currently 11.5% to 15% depending on the characteristics of the portfolio.
Multiples for current par note rate 30 year conventional co-issue MSR’s started the quarter between a 4.25 and 5.25 base multiple. Multiples for current par note rate 30 year government co-issue MSR’s are between 3.00x-4.00x (service fee and geographic specific). However, due to the Covid19 crisis, many buyers pulled out of the market completely or severely lowered prices. As of 3/31/2020 conventional prices range from 0.5x-2x.
Effective Multiples (Net Multiples) – Both conventional and government co-issue bids have many loan level price adjustors that will net down the actual purchase price. For conventional we see net multiple paid at a quarter to half multiple lower than the base. For governments we see net multiple paid at a half to full multiple lower than the base.
Conventional Yields – purchaser unlevered yields for conventional are currently 11% to 13% depending on the characteristics of the portfolio.
Government Yields – purchaser unlevered yields for government are currently 13% to 16% depending on the characteristics of the portfolio.
MBA Purchase & Refi Index:
The graph below shows the MBA purchase and refi index information since 2009. For the quarter, the refi index averaged 3486.4 compared to the same period in 2019 which averaged 1159.8. The purchase index did not see similar increases with the 1st quarter averaging 271.9 in 2020 compared to an average of 255.5 in 2019. This quarter peak of 6418.9 on the refi index was the highest level observed since the week of 4/17/2009 when the index hit 6540.7. With rates as low as they were this quarter, refinance activity would have likely hit an all-time high if it had not been for Covid 19 and the impact it is having in the marketplace since the middle of March.
Prepayment speeds overall for the quarter were down slightly on Conventional product with the CPR for the quarter coming in at 18.923% compared to 19.286% last quarter, however they were trending up with the March numbers actually coming in at a 23.679% CPR. GNMA speeds showed a similar pattern with the quarterly number at 21.684% and the March numbers at 23.786%. Overall these numbers represent a 9.4% drop in speeds for the GNMA product, and a 1.9% drop in conventional speeds quarter over quarter, but are still a lot faster than what was observed during the 1st quarter of 2019. The fastest vintage by far for both Conventional and Government product continues to be the 2018 vintage with conventional speeds at 32.556% and government speeds at 38.076% for the quarter.
Overall, for the prior twelve months, prepays across all Conventional Fixed 30 year products speeds averaged 15.011% and GNMA Fixed 30yr averaged 18.573% for the year.