The second quarter of 2020 has been a roller coaster ride for most companies. The quarter began with states implementing lockdowns as borrowers starting requesting forbearance plans with their servicer. Initial implications on the amount and severity of the forbearance plans compounded on the already turbulent market. As the quarter progressed, Agencies began to provide guidance and some borrowers continued to make payments even while on forbearance plans. The updated regulations coupled with mortgages rates dropping to historic lows strengthened the origination market and provided strong margins for originators; closing out the quarter feeling much better than how it started.
Overall, we observed the 10 year treasury rate remain very flat over the quarter moving from .670% on 3/31 to .657% on 6/30 with a low point for the quarter at .571% on 4/21. Mortgage rates were more volatile with the FHLMC survey rate moving from 3.50% to 3.13% over the course of the quarter and the FNMA current coupon moving from 1.797% to 1.565% during the same period. We did see some stabilization in the yield curve during the quarter with the average spread between the 3M and 10Yr rates at 7.3bp; however, there was a point in time during the quarter when the 3 month rate was 85bps above the 10 year.
Lower interest rates did continue to drive the refinance market with the average weekly MBA refi index at 3697.7 for the quarter compared to 3486.4 during the first quarter. The levels seen throughout the quarter remained below the short-term peaks observed during the first week of March when the index reached 6418.9. Purchase applications increased significantly over the quarter averaging a 6% increase for the full quarter, but ending the quarter at 325.2, which is a 20% increase over the same period a year ago.
Short-term rates, which typically impact float earnings and advance costs, precipitously dropped as the 3 month libor rate went from 1.45% down to .302% over the course of the quarter. This drop has had an adverse impact to valuations as typical float earnings are less than IOE rates in a significant number of states.
IMA Risk Analytics for Q2 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 short end of the curve shifted down and long end slightly increased which led to a steepened interest rate environment. The 10 year point slightly lowered, and we saw small decreases in MSR values as most MSR exposure is concentrated around 10 year tenor.
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 short tenors decrease while the long tenors saw small increases, resulting in a steepening of the curve.
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 four trades for Q2 2020. Market activity was impacted by uncertainty around Covid 19, unknown impacts of forbearance plans, and stimulus plans on the mortgage industry. Co-Issue activity almost disappeared during the beginning of April, but has been making a steady comeback with many buyers re-entering the market, and publishing updated grids on a regular basis throughout the quarter.
The tombstones below provide details of the trades IMA observed during the quarter:
Market Trade Feedback:
Pricing for current par note rate product and recent vintages of 30 year conventional MSR’s have dropped by about a full multiple since last quarter and are at 3.25x to 3.5x. Pricing for current par rate, recent vintage 30 year government product has dropped closer to a 1.50x and are now at 1.5x to 2.25x. Different geographies may adjust this multiple +/- 0.5x. For trades at above current market levels, expect the trades to be 0.50x-2.00x below above levels depending upon actual note rates.
Effective Multiples (Net Multiples) – multiples may net down by .10x to .25x because of terms in the LOI or loan exclusions.
Conventional Yields – purchaser unlevered yields for conventional are currently 10.5% to 12.5% depending on the characteristics of the portfolio.
Government Yields – purchaser unlevered yields for government are currently 14.5% to 18% 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 0.00x and 1.50x base multiple (some with actual published prices, others by dropping par rates to well below current market rates). Over the quarter, pricing has recovered and is back in the 2.5x - 3.5x range. Multiples for current par note rate 30 year government co-issue MSR’s also dropped to close to 0.00x, and are slowly starting to come back and are now generally between 1.5x-2.25x (service fee and geographic specific).
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 0.25x – 0.5x lower than the base. For governments we see net multiple paid at a 0.5x – 1x lower than the base.
Conventional Yields – purchaser unlevered yields for conventional are currently 12% to 15% depending on the characteristics of the portfolio.
Government Yields – purchaser unlevered yields for government are currently 15% to 18% depending on the characteristics of the portfolio.
The chart on the next page shows a comparison of average Co-Issue Net Multiples by state for a FNMA Fixed 30yr loan @ 3.00% WAC, $250,000 balance, 760 FICO, and 80% LTV Retail product:
Prepayment speeds increased significantly during the second quarter despite the Covid concerns with the CPR for the quarter coming in at 32.461% compared to 18.923% last quarter (a 71.5% increase), with the actual June prepays coming in at 35.803%. GNMA speeds showed a similar pattern with the quarterly number at 32.534% compared to 21.684% last quarter (a 50% increase) with the June number spiking up to 41.459%. The fastest vintage by far for both Conventional and Government product continues to be the 2018 vintage with conventional speeds at 49.362% and government speeds at 41.478% for the quarter.
Overall, for the prior twelve months, prepays across all Conventional Fixed 30 year products speeds averaged 19.176% and GNMA Fixed 30yr averaged 22.355% for the year.