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Upcoming Conferences

Several Compass sales directors and canadian needs a prescription in us 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.

The New England Mortgage Expo: Jan. 12, 2018  |  Uncasville, CT
MBA’s Independent Mortgage Bankers Conference: Jan. 22, 2018  | 
Fernandina Beach, FL
TMBA Southern Secondary Market Conference: Feb. 6, 2018  | 
Houston, TX

Market Update

As we approach year-end, much speculation has been on Janet Yellen’s last press conference as FOMC Chair.  As expected, the Fed raised rates another 25bps on 12/13/17, and Chair Yellen’s message about increases in fed fund rates (three increases are forecasted for 2018) and the economy were consistent with the previous commentary.  Since passage of the tax bill will likely have implications on monetary policy in 2018, it’s likely that FOMC members will wait for the details before adjusting any forecasts.  Waiting for the final details of the tax bill may also dovetail with any re-setting of monetary policy until after Governor Powell is confirmed as Chair of the FOMC.  The possibility of four new Fed governors in 2018 will likely impact policy going forward.

The yield curve continues to flatten, and the 2-10 spread currently sits at 55bps vs. 80bps in late October.  As the 2-10 spread flattens and moves toward zero, a recession signal seems inevitable over the next year or two.  It is likely the curve will steepen due to more relaxed fiscal policy, larger budget deficits and higher inflation expectations.

There has been a limited impact from the Fed’s balance sheet normalization program that started in October.  Agency MBS holdings have not declined, and agency MBS supply is typically low in Q4 and Q1.  Spreads should be tested next summer when supply is expected to pick up and portfolio run-off increases.

The three-month debt ceiling suspension expired on 12/8/17, and Congress has not authorized a new suspension or increase in the ceiling, which means the government can likely stretch their extraordinary measures until mid-March 2018.  Once the ceiling is increased or suspended again, a large amount of bill issuance is expected, which should increase short-term rates and continue to flatten the yield curve.

As we look ahead toward 2018, there are several themes to be followed: a flat/inverted yield curve could cause credit spreads to widen, the possibility of unintended consequences of tax reform, the potential for larger deficits, issues raising the debt ceiling and the addition of possibly four new Fed Governors.

– Jason Freydberg

Buy-Up/Buy-Down Grids

BU/BD Grids Note To Readers: As a result of the Agencies increasing customization of seller BU/BD grids and the variability with which we receive grids we are unfortunately no longer able to provide actual BU/BD color in our Newsletter. We will continue to monitor the Trust IO market and set directional expectations for BU/BD grids within the Newsletter. Though no BU/BD color will appear in this Newsletter, we can provide client-specific month over month reconciliation and color. Should this be of interest please reach out to your Compass Account Manager.

We saw a relatively quiet month ending with December Class A as FNCL was off about 4 bps to close the period at 3.03% while our FN30 current note was unchanged at 4.33%.  We see the same story in volatility – persistently low across markets.  In coupon swaps the 3.0/3.5 swap was unchanged while, interestingly, the 3.5/4.0 swap tightened 6.5 bps.  FN/FG swaps were unchanged, once again.  With rates off slightly and a lack of volatility, Trust IO multiples were off about 20 bps on average in coupons representing current production.  Given the small change in rates and continued lack of volatility, we expect the Agencies to reprice BU/BD multiples slightly lower, consistent with the move in Trust IOs, however with the tightening in 3.5/4.0 swap we may see some angling from the Agencies in the 4.25 and 4.375 note rates.

– Virgil Caselli

Excess Primary-Secondary Spreads Color

We began November with FN30 MBS yielding 2.99% (FNCL) and borrowers paying 4.31% for a moving average excess primary-secondary (xPS) spread of 7 bps. Rates declined to start the month before rising rapidly leading to a period of increased volatility before drifting upwards again at the end of the month.

Last month as we moved further into fall and rates began to rise; originators saw production stagnate and were incented to reduce excess margins. This month rates remained at their elevated levels and became more volatile when starting to decline.  Last month 23 of originators surveyed reported being below their capacity level, this month that number has changed just slightly with 22 originators being below capacity and one survey recipient indicated being slightly over capacity.  Despite this small shift, the higher rate environment and seasonality impacted the majority of lenders.  Last month 5 lenders stated they saw an increase in production; however this month just 2 reported an increase in production and 12 of the 28 lenders surveyed reported a slight decline.  The decline in production impacted backlogs as well with the number of lenders reporting backlogs declining from 3 to 2 out of 28. Similarly, the level of excess margin declined slightly with no originators this month stating they had moderate excess margin and just 6 reporting some level of excess margin built into rate sheets.

We ended December 11th with FNCL at 3.03% and our moving average xPS spread at 5 bps.  Next month, if FNCL continues its upward trend, we would expect to see xPS decline towards 0 as production slows and the back to back holiday weeks take their toll on production.

– Sam Rockwell

Specified Pool Commentary

Specified pool pay-ups saw flat to small increases overall after decreasing moderately last month. All eyes are on this week’s FOMC where it is widely expected that the Fed will raise interest rates after another strong job creation number in November. Fed Fund Futures are implying 99+% chance of a rate hike taking place at the December meeting. Jerome Powell, the Fed’s Next Chairman, was quoted at his confirmation hearing as saying “I think conditions are supportive” in regards to a rate hike. Reading the tea leaves for 2018 rate hikes is harder to gauge. In September, the FOMC predicted that it would increase rates three times in 2018 and twice in 2019. The FOMC will have to account for the pending tax cut which could complicate the rate decision project. “We will incorporate when it’s done,” Powell said during his confirmation hearing in regards to future rate hike projections. President of the New York Fed William Dudley was quoted saying “I’m not in favor of tax stimulus at the current time because the economy doesn’t really need it.” On the prepayment speed front, November speeds decreased approximately 10% which was in line with most analyst projections. Analysts are expecting December speeds to decrease with rates increasing and the refinance index and seasonal both projected to drop.

Of note, this makes it the first time in three months that the pay-ups for the FN30 4.5 coupon pools increased with the 85K and 125K pools leading the pack. The 85K 4.5 pool moved from +84/32 to +90/32 and the 125K 4.5 moved from +54/32 to +59/32. Pay-ups for the FN30 3.5 coupon pools decreased this month with the CR pool (-4/32) and 125K pool (-3/32) being pools of note. The FN30 3.0 coupon pools saw increases month over month with the 175K pool increasing +2/32 and the 125K pool increasing +2/32 to lead the way. Pay-ups for the FN15 3.5 coupon pools increased slightly. The 150K increased from +24/32 to +26/32, and the 175K increased from +20/32 to +22/32.

– Mike Vough

MSR Rich/Cheap & Mandatory/Best Effort Spread

Bonds have experienced a modest sell-off with rates rising in November and December, and during this time we’ve seen an increase in the MSR Rich/Cheap IRRs and Gross Profit Margins along with a widening of the Best Efforts to Mandatory spread. MSR values have increased in November as aggregators weakened their bid on servicing assets. The average IRR value in November was 7.88%, a 0.25% increase compared to the October readings, with a peak value of 9.30% and a low value of 6.63%. December’s observations showed an increase in the Conventional Best Effort (BE)/Mandatory Spread and the Profit Margins month-over-month. The peak BE/Mandatory Spread value was 44 bps, and the trough was 33 bps, with an average value of 40 bps, which is a 3 bps increase from our November observation. Profit Margins displayed an average reading of 194 bps (a 3 bps increase relative to November’s readings) with a peak of 212 bps and a trough of 176 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 30-day period ending December 13, 2017, decreased while rates traded in a tighter range (5 bps range in this period versus 13 bps in the prior period), with the average yield decreasing month over month by 0.4 bps.  The average volume for the last 30 days was 79.3% of our base volume (vs. 85.1% in the prior period) ranging from a low of 24% to a high of 115%.  The average yield on the FN30 RNY in this period was 3.473% (vs. 3.477% in the prior period) ranging from a low of 3.448% to a high of 3.493%.

– Bopha Sok