The Month in Review December 2013

Transcription

1 Compass Analytics 580 California Street, Suite 1725 San Francisco, CA The Month in Review December 2013 What's New? Thank you for all of your support in 2013! Best wishes for the holiday season and a happy new year! User Conference Webinar Series Over the next few months we will be presenting the following topics from our User Conference as a Webinar series. Please look out for Webinar invites as well as some appearances by guest speakers and additional topics to compliment these training opportunities. 1. Primary/Secondary Mortgage Rate Modeling 2. CompassPoint MSR Model Enhancements 3. Retaining Servicing 1 Year Later 4. Advanced Margin Maintenance Strategies 5. Pricing & Hedging Jumbo Prime Products 6. Update on the Mortgage Servicing Rights Market 7. Best Practices in Economic & Regulatory Stress Testing Company Cash Flow Training Series Over the next month we will be implementing a series of small group training Webinars to cover CompassPoint Company Cash Flow tools and dive into budgeting and forecasting best practices. These sessions will only be open to a limited number of participants in order to allow for attendees to ask questions and drill into their own Company Cash Flow set-up. We will be repeating them regularly so that anyone looking to become more familiar with modeling projected changes in production and profitability can participate in the valuable training opportunities. Stay tuned for invitations to register in the next few weeks. Webcasts Trainings Available Also, ask us about our growing library of Webcasts (recorded trainings) that cover many CompassPoint tools and functionality as well as current business topics such as retaining servicing. There is no fee for Webinars or Webcasts and the material is suitable for various levels. Typically Webinars are reserved for current Compass clients, but for more information about registering and Webinar training opportunities please kmccann@compassanalytics.com.

2 Market Update Notwithstanding the improvements seen recently in several economic measures, most notably the drop in unemployment claims and the gains in job growth, the Fed still has much to think about as they address the unwinding of the ongoing financial stimulus. The Fed's preferred measure of price inflation, the core price index for personal consumption expenditures (PCEPI) remains stubbornly low and the gap between core CPI and core PCEPI remains unusually wide. With core PCEPI remaining about a full percentage point below the stated target, moves to unwind the stimulus are made more difficult. In a paper distributed by the Federal Reserve Bank of San Francisco, the cause of this gap and its potential effects on Fed policy are explained. With core CPI running about 0.5% higher than core PCEPI, consumers may be feeling more of a bite from inflation and the economy may be running a little hotter than the Fed's preferred measure would assume. Typically, this gap will not remain at the current levels for long, but the divergence, averaging 0.34% since August 2011, makes it the longest sustained gap between the two inflation measures in the past 10 years. In the case of the recent gap, the divergence is a factor of the how the baskets of goods are weighted and how often the weightings change. In the CPI basket, housing currently weights to 32% of the basket. The weighting of housing and the other components in the CPI basket are adjusted every two years. For PCEPI, housing weights to only 15% and that weighting may change quarterly. In a scenario of rebounding housing prices, core CPI will currently feel those increases at more than double the rate of core PCEPI. A look back at the causes of prior gaps in the two measures points to a strong correlation between housing inflation and the gap in core CPI/PCEPI. How does all this fit into the Fed's mindset? St Louis Fed President James Bullard summed up the view recently when he said he was puzzled by the persistently low inflation despite the ongoing Fed stimulus. Of course, this persistent low inflation is in part driven by what measure is used and how that measure typically changes over time. Despite the length of the current gap in core PCEPI vs. core CPI, those measures will eventually tighten to one another and based on historical readings, the gap will likely tighten via an increase in core PCEPI rather than a decrease in core CPI. At that point, the Fed will have more comfort in a decision to unwind the stimulus. - Lindsay Hill Copyright Compass Analytics, LLC Page 2

3 Excess Primary-Secondary Spread Color We began November with FN30 MBS yielding 3.20% (FNCL) and borrowers paying 4.46%, for an excess primary-secondary spread of 26 basis points. FNCL increased 10 basis points in early November before jumping another 14 basis points to 3.43% on November 8th, when the strong nonfarm payroll report sparked heavy selling in bond markets. From there, mortgages were range-bound until December, when strong manufacturing and employment numbers forced participants to reconsider a taper announcement at the December FOMC meeting. Our movingaverage excess primary-secondary spread had quietly fallen from 30 bps to 20 bps by December 3rd, indicating that lenders have been trimming margins during the selloff. The MBA refinance index fell 23% during the period and Compass' refinance % of production dropped 6% to 40%. Production levels held up fairly well; on December 9th, Compass's 3-day average production level was 97.6% of early November volumes. When the market closed on December 9th, FNCL closed at 3.5%, 30 basis points above its October 31st close and borrower rate also increased 30 basis points to 4.76%, implying an unchanged primary-secondary spread. This is misleading, however, as the Agency guarantee fee hikes announced on December 9th will increase the "baseline" primary-secondary spread by 10 basis points (by 14 bps for 30 year mortgages and 4 basis points for 15 year, on average). Even if margins are constant, expect the primarysecondary spread to widen 10 basis points in the coming months as these g-fee changes are absorbed into rate sheets. Last month, we predicted that if taper timeline expectations contract and rates climb, the excess PS spread will print around 20 basis points. The economic perception did improve, but the spread printed at 26 basis points so originator margins were resilient. If conforming 30 year mortgages continue to be originated around the 4.75% level, we would expect early January's excess primary-secondary spread to print around 25 basis points. If rates rise and the guarantee fee changes are felt immediately, we predict that the excess primarysecondary spread will print around 20 basis points. - Dylan Faerstein Copyright Compass Analytics, LLC Page 3

4 Specified Pool Commentary Bah humbug...stingy December pay-ups are wrapping up a lousy second half of the year for specified pools. Last month's modest improvement was short lived as pay-ups have slipped back towards the lows posted earlier in the fall. The familiar headwinds of expensive rolls and the looming Fed tapering decision have persisted, however yearend balance sheet constraints and profit taking have added to the woes. Prepayment speeds slid once again in November capping off a sixth consecutive month of decreases. The story is not likely to change any time soon as investors remain on the defensive with the Fed's finger on the taper button. As is typically the case, 10yr and 20yr paper have benefited during the slide as banks prefer the profile and extension protection that these products provide. Of note, low loan balance "LLB" FN30 4.5s have given up roughly half a point over the past month, moving from 52/32 down to 35/32. FN20yr 3.5s pay-ups surged to 69/32 and 20yr 4.0s of 41/32 are almost double last month's level of 22/32. The movement on the FN10yr 3.0 pay-up was equally dramatic as it jumped from 19/32 up to 43/32. New Production (0-1WALA) 50bps spread between gross and net rate Levels are for indicative purposes only -Jeff Casella Copyright Compass Analytics, LLC Page 4

5 Margin Tracker The FN30CC Spread is the difference between the FN30 Note Rate and the FN30 Current Coupon, in basis points. Rates marched higher throughout November and early December, fueled by stronger than expected employment data and a temporary debt ceiling deal in Congress. We observed FN30 Current Coupon (FN30Interp) rise from 3.25 in early November to 3.56 by early December. Typically, mortgage rates and note rate-level spreads over current coupon are negatively correlated, which again was illustrated by our observations in November and early December with the spreads tightening as rates increased and widening when rates declined. With rates steadily climbing throughout the month, the average spread between FN30NR and FN30CC tightened by over 3bps versus last month's observations. The tightest the spread got was 114bps; the widest was 130bps; the average was 124bps. The FN30 NR is the average conventional note rate across a subset of Compass' client base normalized for volume. The FN30 CC is the Fannie 30-year Mortgage Backed Security yield at par 30 days out. The difference between these numbers gives an indication as to how much margin is priced into the secondary market. The primary factors are interest rates, operational capacity and warehouse line constraints. Lenders may also be slower to improve rates during a rally, and quick to drop their pricing during a sell-off. -Bob Gundel Copyright Compass Analytics, LLC Page 5

6 MSR Rich/Cheap & Mandatory/Best Effort Spread With rates pushing higher throughout November and early December, we observed very little change in Best Efforts to Mandatory spread, average MSR Rich/Cheap IRR tighten slightly, and profit margins versus last month's observations. With servicing assets in high demand, MSR Rich/Cheap averaged 11.7%, a 0.5% increase from the reading in October. The peak IRR value was 15.4% and the low value was 9.8%. As new correspondent investors and coissue/bifurcation programs continue to surface, October readings showed a slight widening of the Conventional BE/Mandatory Spread with an average value of 47 bps, a 2 bp increase over the observation in October. The peak value was 51 bps and the trough was 30 bps, with the spread tightening throughout the observation period. The average 30-year gross profit margin remained static despite the push higher in rate. Profit Margins in November displayed an average reading of 146bps, (1bp wider versus the average in October) with a peak of 159bps and a trough of 108bps. The MSR Rich/Cheap gives the internal rate of return for retaining servicing and provides a general measure of how aggressive aggregators are in their servicing bid. If a client is considering retaining servicing, or is deciding between retaining or selling servicing-released on any given day, this number can serve as a guide. Compass uses best execution across aggregators each day for note rates bracketing the FN30NR. The Mandatory/BE spread tracks the difference of a representative seller's basis point pick-up using mandatory delivery instead of best efforts. Compass uses several investors, for best efforts and mandatory, and compares the best execution of each of the two delivery methods for note rates flanking the FN30NR. The Conventional 30-year average gross profit margin tracks the originator's gross profit margin, i.e. the difference between what the originator pays for the loan (what is posted on a rate sheet) and what the originator could sell the loan for into the secondary market. - Bob Gundel Copyright Compass Analytics, LLC Page 6

7 Monthly Spreads Mortgage backed security yields were volatile over the past five weeks (FNCL ranged from 3.20% to 3.56%), as market participants refined their taper timeline expectations with each new data point. Although most folks do not anticipate a reduction in asset purchases in December, there is no question that the economic picture improved during November, as supported by mortgage spread widening. Good economic data puts upward pressure on rates and increases the likelihood that the Fed will stop purchasing assets, particularly MBS, sooner causing mortgages to widen relative to other rates assets. Mortgage yield, measured as a spread over a blend of the 2 and 10 year points on the swap curve, tightened in early November, but the strong employment report quickly reversed this move and the spread steadily widened during the month, picking up 6 basis points. It closed on December 9th at 86 basis points, in line with the pre-qe3 average. On a LIBOR-OAS basis, FNMA 3.5 coupon mortgage yield widened throughout November as MBS investors demanded more yield in anticipation for the Fed's support to end. It closed the period at 20.8 basis points, 18 basis points above its November 1st level. On December 9th, the 2-10 Treasury spread closed at 254 bps, steepening 23 basis points since November 1st. -Dylan Faerstein Copyright Compass Analytics, LLC Page 7

8 Swap Curve Analysis During November the market managed to steepen on the back of reportedly better economic data, equities rallying, and tapering discussion from the Fed. In the first week of November, economic data suggested better GDP quarter over quarter change with +2.8% as well as strong Non-Farm Payrolls with 204k print vs. consensus of 120k. After the NFP print, the market almost instantaneously sold off 13bps in 10yr swaps. The move up from NFP was however wiped out; however, with Bernanke making moves for his exit from Fed Chairman and discussing the future of the Fed's market impact. Empire State Manufacturing came in at a disappointing -2.2 from consensus of 5.5 furthering the rally of swap spreads. The following week, Fed minutes were released highlighting that "economic activity continued to rise at a moderate pace" and that partial unwinding of QE would begin through reverse repo transactions again putting steepening momentum on swap curve. With Thanksgiving being a shortened week, little to no market activity and reduced trading did little for spreads. Heading into December, spreads again continued the widening on repeated talks of tapering leading into December's NFP print of 203k vs. 180k consensus causing a continuation of curve steepening. The entire swap curve is steeper, 2s-10s swap spreads closes the month at 232bps steeper by 18bps from November, while 2s-5s spread closes at 118bps, 10 bps steeper. -Saket Nigam Copyright Compass Analytics, LLC Page 8

9 Production Index Production in the 30-day period ending December 8, 2013 increased slightly while rates traded in a wider range (30 bps range in this period versus 23 bps in the prior period), with the average yield increasing month over month by 16 bps. Average volume for the last 30 days was 97% of our base volume (vs. 87% in the prior period) ranging from a low of 43% to a high of 169%. The average yield on the FN30 RNY in this period was 3.957% (vs % in the prior period) ranging from a low of 3.821% to a high of 4.118%. -Bopha Sok Compass Analytics Copyright Compass Analytics, LLC Page 9