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Upcoming Conferences

Several Compass sales directors and order cialis account managers will be attending the following conferences in the next few months. If you are attending and would like to set up a meeting to discuss CompassPoint™ tools, functionality, or partnership, please email Phalla Sok.

MBA National Secondary Market Conference & Expo: April 30th-May 3rd | New York, NY
MBA of Georgia Convention: May 4th-May 7th | Destin, FL
MBA Great River Conference: May 9th-11th | Memphis, TN

Market Update

Bond yields spent most of the previous month pushing lower with yield support near 2.30% in the 10-year treasury finally collapsing and yields moving below 2.20%. Much of the recent talk in the bonds markets has centered around the eventual reduction in the Fed’s enormous balance sheet. Along with the Fed’s March rate hike of 25 basis points was some color on the expected reduction in both treasury and mortgage-backed securities from the Fed’s current $4.5 trillion in total holdings. Current expectation is for a gradual “roll-off” of securities as incoming principle is no longer reinvested in additional securities. It would likely take several years for the balance sheet to reach more normal levels when reduced in this fashion. A five-year estimate of the balance sheet reduction using a roll-off approach shows approximately 1/3, or $1.5 trillion, in cumulative assets leaving the books over that time.
In addition to the straight balance sheet reduction, though, some Fed officials have remarked that the roll-off approach could replace the need for at least some of the additional Fed Funds rate hikes that may be necessary over the next few years. Bonds did see some buying pressure on the notion that a tapering of Fed assets, especially using a roll-off approach, could eliminate the need for some Fed Funds hikes.
In addition to the recent news out of the Fed, bond yields have pushed lower on a combination of weaker domestic growth expectations and global stability concerns.  A weak employment report for March added to concerns that second-quarter growth would fall short of the first quarter, as it has in some recent years.  Add to the mix North Korea, Syria, more EU exit pressure in France, and the uncertainty of Trump’s domestic priorities, and you have a volatile bond market that seems to be moving against conventional wisdom for the time being.
– Lindsay Hill

Buy-Up/Buy-Down Grids

We experienced a nice rally as the month between April and May BU/BD grid issuance progressed.  As the Agencies began issuing May grids in the past week, FNCL sat below 3% for the first time in 2017, finishing the month at about 2.99%.  With the sustained rally Trust IO prices took a big hit.  In TBAs, 30Yr conventional coupon swaps were tighter by about 14 tics in 3.0/3.5 and 13 tics 3.5/4.0 swaps while FN30/FG30 swaps were nearly unchanged.  Both Agencies priced May multiples in a manner consistent manner with the move in Trust IO prices as our ratios proved fairly accurate for most note rates.
– Virgil Caselli

Excess Primary-Secondary Spreads Color

We began March with FN30 MBS yielding 3.2% (FNCL) and borrowers paying 4.5% for a moving average excess primary-secondary (xPS) spread of 8 bps. Rates steadily climbed at the start of March before reversing towards the middle of the month and continuing to gradually decline for the remainder of March and into early April. As rates declined and production began to pick back up originators began working back in the margin the removed during the previous rally.

Last month’s survey saw production remain low but showed glimpses of a turn around, while lenders remained well below capacity.  This month, as rates started to decline production picked back up, originators started to close in on reaching capacity while margin levels fluctuated due to intra month volatility.  Last month, just 2 lenders reported being at capacity with none stating they were over capacity.  This month as rates tapered off their highs and the weather warmed up 4 of those surveyed were at capacity and 2 lenders even reported being slightly over capacity.  Similarly last month 16 of 28 survey recipients saw declines in production while this month 20 saw some level of increase and just 2 saw a decline.  The rise in production has begun to impact backlogs, however due to many originators being well under capacity the change in backlogs was muted this month with the number of those surveyed with some backlog increasing by 2, to 5.  Meanwhile the rally in the beginning of March resulted in a drop in margin that stayed with originators into the rate decline occurring throughout the second half of March and into April.  The end result was no change in the survey results this month for excess profit margin, with 19 saying they had no extra margin and 9 reporting a little extra margin.  An important note is that while the survey results for excess did not change on the aggregate, the lenders reporting excess margin did, as originators closely monitor production levels and margin strategy.

As FNCL moved away from its recent highs and spring brought warmer weather to much of the country over the past month, lenders saw a pop in production and the possibility of reaching capacity levels became a reality for many lenders. We ended March 13th with FNCL at 2.99% and our moving average xPS spread at 11 bps.  Next month, if FNCL remains at this level and production continues to increase, we expect to see xPS to decline towards 8bps as lenders adjust to the lower rate environment.

– Sam Rockwell

Specified Pool Commentary

Specified pool pay-ups overall saw small to moderate losses over the last two months. With the Fed’s March rate hike in the rear view mirror, all eyes are on the Fed’s plan to raise rates two more times a year and the potential shrinking of its 4.5 trillion balance sheet. Weaker than forecasted information on jobs, consumer spending, and inflation together with investors becoming skittish about U.S. tension with Syria and North Korea have reduced the probability of a rate hike in June to 36%. This is compared to the implied Federal Fund Future probability of 57% chance of a rate hike prior to the March jobs report. Despite some of this news, Kansas City Fed President Esther George spoke this week and stated that the Fed should stick with the plan despite the economy’s recent “fits and starts.” George was quoted this week saying “The economy has these fits and starts and we’ve seen this over the last five years.”  Fed Vice Chairman Fischer spoke this week as well and seemed optimistic regarding any potential “taper tantrum” that might take place when the Fed begins to reduce its balance sheet.  March prepayment speeds came in slightly below analyst expectations with the main cause of the increase being the day count. April speeds are projected to decline slightly due to rising rates, declining turnover, and a rising refinance index.

Of note, pay-ups for FN30 3.5 coupon pools decreased across the board with the 85K and 125K pools leading the way. The 85K 3.5 pool moved from +29/32 TO +23/32 and the 125K moved from +17/32 to +14/32. The FN30 CK pool also continued to see increased in pay-ups with the 4 (+13/32) and the 4.5 (+29/32) leading the pack. Pay-ups for the FN30 4.5 coupon were up across the board as well with the 110K (+9/32) and the 150K (+8/32) propping up the group. Pay-ups for FN15 products were down with the 85Ks pools leading the way. The 85K 3 pool moved from +11/32 TO +5/32 and the 3.5 pool moved from +36/32 to +28/32. The FN15 2.5 coupon pay-ups compressed to nearly zero for most of the pools as well.

– Mike Vough

MSR Rich/Cheap & Mandatory/Best Effort Spread

With bond prices rising and interest rates declining in March and April, we have seen a decrease in MSR Rich/Cheap IRRs and average Gross Profit Margins while the Best Efforts to Mandatory spread increased. MSR values decreased in March as aggregators strengthen their bid for servicing assets. The average IRR value in March was 7.27%, a -1.99% decrease compared to the prior readings, with a peak value of 8.70% and a low value of 5.92%. March readings showed the Conventional Best Effort (BE)/Mandatory Spread increase while Profit Margins decreased month-over-month. The peak BE/Mandatory Spread value was 45 bps and the trough was 29 bps, with an average value of 36 bps, which is a 2 bps increase relative to our February observation. Profit Margins in March displayed an average reading of 188 bps (a 11 bps decrease relative to February’s readings) with a peak of 204 bps and a trough of 168 bps.

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.

– Sean Welsh

Production Index

Production in the 60-day period ending April 13, 2017, increased while rates traded in a wider range (35 bps range in this period versus 17 bps in the prior period), with the average yield increasing month over month by 2 bps.  Average volume for the last 60 days was 90% of our base volume (vs. 75% in the prior period) ranging from a low of 68% to a high of 141%.  The average yield on the FN30 RNY in this period was 3.685% (vs. 3.664% in the prior period) ranging from a low of 3.512 % to a high of 3.865%.

– Bopha Sok