MBS Market Update: Reconsidering the Fed

Transcription

1 Title Presenter Date MBS Market Update: Reconsidering the Fed Walt Schmidt, CFA March, 214

2 Four Main Themes (While We Wait for Future) The Fed has BEGUN to unwind extraordinary assistance. Certainty about Fed tapering has REDUCED VOLATILITY. Curve in 214 will likely remain STEEP, but next BIG MOVE is for a FLATTER CURVE. CONVEXITY and ROLLDOWN now, wider windows for 215 and beyond. 1

3 It Takes More Than a 1/2 Decade to Work off this Debt Debt to GDP in the U.S. Economy (Through Q4 for 213) Foreign Business Financial Federal Municipal Business Non-Financial Household B Ba Baa A Aa Aaa Source: Bloomberg, Federal Reserve, US Treasury Dept. 2

4 New Issuance Billions And Over 99% of New Issue Flows 99% of today's origination is in Agency space vs. 57% in Jan. 27. Securitized Mortgage Market Origination Non-Agency FHA VA GNMA Other FHLMC FNMA Source: Bloomberg, Federal Reserve, US Treasury Dept. 3

5 Supply Starting to Retreat with Purchases Issuance and Fed Purchases Billions Agency Fixed Rate Securitized Issuance Gross Issuance (Lines) Net Issuance (Bars) Net Issuance Gross Issuance Fed Net Purchases Source: FTN Financial and KDS Global 4

6 Fed s Balance Sheet Continues to Grow Outright U.S. Federal Reserve Balance Sheet 4,5 4,5 Agencies 4, MBS 4, Other 3,5 Treasuries 3,5 Reserve Balances 3, 3, $ Billions 2,5 2, September 17, 28 2,5 2, 1,5 1,5 1, 1, Source: FTN Financial and the NY Fed 5

7 And As a Percentage of Overall MBS Market 3% Fed Ownership of Outstanding Fixed MBS Market January 29 - Current % Ownership of Outstanding Market 25% 2% 15% 1% 5% % Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: FTN Financial, NY Fed and KDS Global 6

8 Bank Holdings Have Flat-Lined Since 212 1,4 U.S. Commercial Bank Agency MBS Holdings 1,3 1,2 1,1 $ Billions 1, Source: FTN Financial, NYFRB 7

9 Money Managers Turned Cautious in 213 1, Mutual Fund Holdings of MBS and Agencies $ Billions Source: FTN Financial, NYFRB 8

10 1, Foreign Holdings Have Flat-Lined, As Well Foreign Official Holdings of MBS and Agency Securities $ Billions Source: FTN Financial, NYFRB 9

11 Growth in REITs Looks To Be Over Mortgage REIT Market Capitalization $ Billions Source: FTN Financial, NYFRB 1

12 Dealers Are Very Involved Currently Steep Curve 14 Dealer Holdings of MBS Securities $ Billions Source: FTN Financial, NYFRB 11

13 MBS Spreads Now Fair? FNCL MBS Static Spreads 3yr Current Coupon vs 5/1 UST Blend 15yr Curent Coupon vs 2/5 UST Blend yr 3yr 15yr yr Avg: StDev: Current: Source: FTN Financial and Bloomberg 12

14 LOAS Levels Very Close to QE Averages MBS LOAS Since 29 FNCL 3yr and 15yr LOAS yr 15yr 3yr 15yr Avg: StDev: 7 1 Current: Source: FTN Financial and YieldBook 13

15 16 14 Vol Has Plummeted In Light of Fed Clarity Standard Deviation of MBS Performance FNCL 3.5 and FNCI 3. vs 2/5/1 UST Curve FNCL day FNCL day 12 1 FNCI 3. 3-day FNCI 3. 1-day Ticks Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 Source: FTN Financial and TradeWeb 14

16 Curve Still VERY Steep Bps Shape of 2/1 Yield Curve In QE Era UST UST Average Swap Swap Average Source: FTN Financial and Bloomberg 1 15

17 Money-Ness Of the MBS Market Has Changed 3yr Conventional Fixed Thresholds: 8 LTV, 72 FICO, and 15k LB Outstanding Balance Billions s 3.5s 4.s 4.5s 5.s 5.5s 6.s Marginally Ref inanceable = ~86% on 4/3/13 = ~38% on 3/7/14 Fully Ref inanceable = ~65% on 4/3/13 = ~19% on 3/7/14 < > 7.5 Gross WAC Bucket 6.5s HARP Eligible - 2.5% Willing and Able - 63% Unwilling or Unable - 34% 4.39% Note Rate of 3/7/ % Note Rate of 4/3/13 Source: FTN Financial and KDS Global 16

18 The S Curve: Essential View of Prepayments 1-Month CPR Incentive to Refinance (bps) Source: FTN Financial 18 17

19 Baseline S-Curves for 3yr Fixed Product 35 3 FN FH S-Curve Analysis Last 12 Months 3yr Fixed MBS, WALA 1 Month CPR GN G Refinancing Incentive (WAC less Current Rate) Source: FTN Financial and KDS Global 18

20 Baseline S-Curves for Conventional by Am Schedule 35 S-Curve Analysis Last 12 Months Conventional Fixed MBS (12-48 WALA Except "New WALA") yr Conventional 2yr Conventional 15yr Conventional 1 Month CPR Refinancing Incentive (WAC less Current Rate) Source: FTN Financial and KDS Global 19

21 The Flatter the S-Curve, the Better the Convexity S-Curve Analysis Last 12 Months 3yr Conventional Fixed MBS (12-48 WALA Except "New WALA") 1 Month CPR <85k LB 85k-11k 11k-15k 175k Max New WALA 1% Investor 8-15 LTV (MHA) LTV (CQ/U6) >125 LTV 3yr Conventional Refinancing Incentive (WAC less Current Rate) Source: FTN Financial and KDS Global 2

22 HARP-Eligible Still Faster Despite Slowdown All Conventional 5.s thru 6.5s 1mo CPR by LTV (May 25 - May 29 Origination) 1 Month CPR >8 FNCL <8 FNCL >8 FGLMC <8 FGLMC Weekly FHLMC Survey Rate Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb Source: FTN Financial and KDS Global 21

23 Conforming Jumbo Negatively Convex 1-Month CPR Conventional Jumbo S-Curve Analysis Last 12 Months 3yr MBS (13+ WALA) Conventional 3yr Universe G2 Jumbo GN 3yr Universe Refinancing Incentive (WAC less Current Rate) Source: FTN Financial and KDS Global 22

24 1mo CPR Post-Reset Hybrid ARMs Very Slow Aging Curve Analysis Last 12 Months Conventional Hybrid ARMs and 3yrs Post-Rset Period WALA Post-Rset Period 3x1s 5x1s 7x1s Conv 3yrs Source: FTN Financial and KDS Global 23

25 Specialty Servicers Volatile for <21 Vintage 1 Month CPR GRNSV NATIONSTAR OCWEN PHH QUICK S-Curve Analysis Last 3 Months 3yr Fixed MBS (49+ WALA) Average (5 Largest Specialty Servicers) 3yr Universe Refinancing Incentive (WAC less Current Rate) Source: FTN Financial and KDS Global 24

26 1 Month CPR Bank Servicers More Consistent S-Curve Analysis Last 3 Months 3yr Fixed MBS (49+ WALA) BOA-CW CHASE CITI USB WFHM Average (5 Largest Bank Servicers) 3yr Universe Refinancing Incentive (WAC less Current Rate) Source: FTN Financial and KDS Global 25

27 Low FICO and LLB Provide Best Turnover Incentive Less Than -5bps Incentive -5bps to bps FICO 5/99-5/1 5/4-12/8 5/99-5/1 5/4-12/ Incentive Less Than -5bps Incentive -5bps to bps CLTV 5/99-5/1 5/4-12/8 5/99-5/1 5/4-12/ n/a.52 n/a 2.98 Incentive Less Than -5bps Incentive -5bps to bps LNSZ 5/99-5/1 5/4-12/8 5/99-5/1 5/4-12/ Source: FTN Financial and KDS Global 26

28 Payups Have Collapsed Convexity is Cheap LLB Pool Payup History 3yr Cpn LLB 3. LLB 3.5 LLB 4. 3yr FHLMC Rate Payup (Ticks) Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: FTN Financial 27

29 Main Relative Value Choices in Mortgage Space Libor Opt Libor Eff Eff Security Description Coupon Price YTM WAL Z-sprd Cost OAS Dura Convx FN AV9481 5x1 Hybrid ARM FN AL yr FN yr 4.5, Low TPO FH 2B2236 New Issue 7x FH New Issue 1x FHR 429 MC 5yr PAC, 175k Max 4.% Collat FN MA yr FHR 431 UV 5yr SEQ, High LTV 4.% Collat FN MA1829 2yr FN AL4762 Multi Family FN AB686 Slightly Seasoned 3.5 3yr, 19 WALA Source: FTN Financial 28

30 Hybrid ARMs, ACMBS and 2yr Roll Down Well Base Case (12mo. Horizon) Base Case TRR vs. Duration Effective Duration 15yr yr 3.5 2yr 3.5 3yr WALA 3yr 3.5 DUS Mega PAC VADM 7x1 Hybrid ARM 1x1 Hybrid ARM 5x1 Hybrid ARM Source: FTN Financial and YieldBook 29

31 Need Convexity to Perform Well in a Rally DnFlat (12mo. Horizon) DnFlat TRR vs. Duration Effective Duration 15yr yr 3.5 2yr 3.5 3yr WALA 3yr 3.5 DUS Mega PAC VADM 7x1 Hybrid ARM 1x1 Hybrid ARM 5x1 Hybrid ARM Source: FTN Financial and YieldBook 3

32 Wider Windows for Bear Flattener UpFlat TRR vs. Duration 15yr yr 3.5 UpFlat (12mo. Horizon) yr 3.5 3yr WALA 3yr 3.5 DUS Mega PAC VADM 7x1 Hybrid ARM 1x1 Hybrid ARM Effective Duration 5x1 Hybrid ARM Source: FTN Financial and YieldBook 31

33 Must Have Tighter Window for Any Steepener. -1. UpSteep TRR vs. Duration 15yr yr 3.5 UpSteep (12mo. Horizon) yr 3.5 3yr WALA 3yr 3.5 DUS Mega PAC VADM 7x1 Hybrid ARM 1x1 Hybrid ARM 5x1 Hybrid ARM Effective Duration Source: FTN Financial and YieldBook 32

34 MBS Hold Value Over LONG Periods Sharpe Ratios- Citigroup BIG and Major Components 1-Year History, Monthly Data BIG MBS CORP Nominal UST Excess AGY SUP/SOV Source: FTN Financial and YieldBook 33

35 MBS Also Do Well in Short Duration Space Sharpe Ratios- Short Duration Index Constituents 1-Year History, Monthly Data 1-5 BIG 15yr FN 15yr GD 1-5 Gov/Corp Nominal Excess 1-5 Credit 1-5 Gov Source: FTN Financial and YieldBook 34

36 Favorite Investment Themes in MBS Current & UIC 3yr Spec Pools for BEAR FLATTENER 12-WALA 7X1s and New Issue 1X1s Agency and Vintage CMBS VADMs and other very well-structured CMOs Middle Coupon Coupon 2yr Cheap Forms of Call Protection in MBS and CMO Post-Reset Hybrid ARM for Short Duration $ 35

37 Four Main Themes (While We Wait for Future) The Fed has BEGUN to unwind extraordinary assistance. Certainty about Fed tapering has REDUCED VOLATILITY. Curve in 214 will likely remain STEEP, but next BIG MOVE is for a FLATTER CURVE. CONVEXITY and ROLLDOWN now, wider windows for 215 and beyond. 36