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Happy holidays, and welcome to the final edition of Compass Analytics’ Monthly Newsletter for 2018. We hope that you found this series helpful throughout the year. If you have any suggestions for content or any other feedback you would like to share, please let us know at info@compass-analytics.com.

Last week, we released an announcement on our ever-expanding integration with Fannie Mae’s Servicing Marketplace. We are the first to integrate to the Servicing Released Premium Rate Sheet v2 (SMP-SRP v2) API—click here to read more!

Looking ahead to 2019, we will be at the following industry conferences and look forward to meeting you there. If you are also attending and would like to set up a meeting to discuss Compass Analytics’ suite of tools or more information about partnering with us, please email Phalla Sok at psok@compass-analytics.com.

January 17The New England Mortgage Expo (Uncasville, CT)
January 28Independent Mortgage Bankers Conference (San Francisco, CA)
February 5Texas MBA Southern Secondary Conference (Houston, TX)
February 12CMLA Rocky Mountain Mortgage Lender’s Expo (Denver, CO)
February 17The Mortgage Collaborative Winter Lender Member Conference (Austin, TX)
February 25National Mortgage Servicing Conference and Expo (Orlando, FL)

Market Update

The treasury yield curve remains flat / inverted with the 2-10 year spread currently at 15bps, 10 basis points tighter than one month ago. With the 2-5 spread inversion hovering around 1bp, it appears inevitable that we will see a 2-10 year inversion in 2019. Routinely, there are several external factors effecting the treasury market, including Brexit news coming from the UK and the US-China trade war truce.

On the economic front, the November jobs report showed that the labor market remains in decent shape. While non-farm payrolls came in weaker than expected at 155k, the 6-month moving average is 195k and the unemployment rate remains unchanged at 3.7%. Steady job growth and further downward pressure on the unemployment rate leading to modest wage pressures should leave the Fed comfortable with the December rate hike.

The market is currently pricing in a 77% chance that Fed raises rates another 25bps on December 19, 2018. Given recent market activity, the general consensus has shifted from 3 or 4 Fed rate hikes in 2019 to the possibility the Fed may pause in 2019 after December’s hike. It is likely that Fed Chair Powell will deliver more dovish comments after next week’s Fed meeting.

Recently, there were reports that Mark Calabria, currently Chief Economist to VP Pence, will be nominated to take over as the new FHFA Director. This nomination needs to be confirmed by the US Senate, but should be taken as a signal that the administration and the Treasury will be proactive with their desire to move housing reform from the status quo of conservatorship. While Director Watt deferred to Congress, the prospect of the new FHFA leadership stands to initiate several administrative steps the FHFA can take to shift from the prevailing status quo, including the end of the conservatorship, either in the form of recapitalization and release, or the potential receivership and subsequent elimination of the current GSEs. Both outcomes entail a smaller government footprint, a goal expressed by the Administration in the past, as well as the likely buildup of capital at the GSEs or their future replacements.

While the FHFA will likely make an initial push for a legislative driven overhaul, building on the success of Credit Risk Transfers (CRT) and the Common Securitization Platform (CSP), it is possible the FHFA will find the administrative reform. These reforms include raising g-gees, raising loan level pricing adjustments and the privatization of the GSE’s which would likely cause such companies to operate in a tighter regulatory environment. The timing of any execution comes at a crucial point, with housing softening (mainly from the 75bps increase in primary mortgage rates), home price appreciation slowing, the Fed’s balance sheet runoff and the run-up to the 2020 Presidential election.

– 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 sustained rally in the month ending with December Class A notification. FNCL came off multi-year highs, finishing the month down 35 bps to 3.77% as global economic concerns sparked a flight to quality. Our Conventional 30Yr note rate fell about 25 bps to 5.5%. Trust IOs took a beating, off about 1 point on average with multiples shedding about 24 bps. In TBAs we had compression across the stack, with the 4.0/4.5 swap 13 ticks tighter and 4.5/5.0 swap 15 ticks tighter. As we have seen in the past with significant compression, we expect the Agencies to diverge from Trust IO ratios.

*IO price source – Bloomberg ALLX IOFN (4.25 interpolated from 4.0, 4.5 coupons)

– Virgil Caselli

Excess Primary-Secondary Spreads Color

We began November with FN30 MBS yielding 4.00% (FNCL) and borrowers paying 5.24% for a moving average excess primary-secondary (xPS) spread of 3 bps. FNCL finished down 13 bps at 3.87% at the end of the month but hit a high of 4.12% on 11/8 and a low of 3.87 on 11/30 during the course of the month.

During November, rates finished the month down approximately 13 bps with FNCL starting the month at 4.00 and finishing the month at 3.87. FNCL shot up 9 bps on 11/2 to 4.09 and then steadily increased to the monthly high of 4.12 on 11/8. FNCL then hit some turbulence and dropped almost 25 bps to finish the month at 3.87. With rates trending downwards, most originators saw stagnation or a slight up tick in production. Even with the recent drop in rates, most originators are still under capacity but that can be chalked up to the holiday season. Last month 23 lenders stated that they were under capacity with 6 saying they were severely under capacity. This month with rates decreasing, 5 originators stated they were severely under capacity, 6 significantly under capacity, and 13 slightly under capacity. November saw flat to small increases in production compared to October. 9 clients saw an increase in production compared to 9 in October. 19 of 28 clients reported that production was either flat, slightly down or significantly down. With reports of flat to slightly up production compared to October, reports of backlog increased slightly compared to last month with 3 survey receipts stating they had small backlog compared to 2 last month. Despite rates decreasing this month, reports of excess margin slightly decrease. This month 8 clients reported having a little extra margin in their rate sheets compared to 9 clients last month.

We ended December 12th with FNCL at 3.77% and our moving average xPS spread at 9 bps. Next month, even if FNCL bucks course and trends upward again we are expecting to see xPS decrease and move closer to flat as the recent drop in rates was not large enough to create pro longed periods of excess margins.

– Mike Vough

Specified Pool Commentary

The Federal Reserve holds its final meeting of the year and market participants widely expect the Fed to raise short term interest rates by another 25 basis points. While Wednesday’s hike seems like a formality, 2019 Fed Policy is anything but certain. The Federal Reserve, an apolitical organization, has been the target of President Trump of late. The President’s public outcry for the Fed to stop raising short term interest rates is only adding uncertainty to an already unclear future. As it stands, the Fed is anticipated to conduct three rate increases next year, however, given recent economic indicators (falling oil prices, higher volatility in U.S. Stock Market and weakening inflation) some analysts believe the Fed may only raise rates once or twice in 2019. Borrowers are certainly hopeful that the Fed will reduce rate hikes in hopes of keeping borrowing costs low.

There was a shift of appetite from November to December. Investors favored higher coupons instead of lower coupons, which is not surprising given the analysis above. The appetite for FN30 3.5 Coupon completed disappeared from the previous month and thus saw the biggest loss from month to month. All other FN30 coupons saw marginal increases from November to December except for the FN30 5.0 Coupon stack. All pools across this coupon stack experienced increases ranging from 5/32 to 11/32 expect. Similarly, higher coupons in FN15 (3.5 and 4.0) saw increases month over month, whereas lower coupons (2.5 and 3) experienced decreases. FN15 4.0 Coupon saw the largest increase, particularly the 85k pool, which increased by 5/32. All other pools in the FN15 4.0 Coupon saw an increase of at least 2/32.

– Brendan McPartland

MSR Rich/Cheap & Mandatory/Best Effort Spread

Bond prices have begun to rally modestly through November and into December as rates have declined, and during this time we have seen a decrease in MSR Rich/Cheap IRRs and Gross Profit Margins while the Best Efforts to Mandatory spread increased relative to last month. MSR values declined for a second consecutive month as aggregators strengthen their bid for servicing. The average IRR value was 7.31%, a -1.16% decrease compared to the November readings, with a peak value of 8.70% and a low value of 6.06%. In December we observed a tightening of Profit Margins and a muted increase of the Conventional Best Effort (BE)/Mandatory Spread relative to last month. The peak BE/Mandatory Spread value was 42 bps and the trough was 30 bps, with an average value of 36 bps, which is a 1bps increase from our November readings. Profit Margins displayed an average reading of 196 bps (-5 bps decline relative to last month) with a peak of 233 bps and a trough of 170 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 14, 2018, decreased while rates traded in a wider range (23 bps range in this period versus 16 bps in the prior period), with the average yield decreasing month over month by 14. Average volume for the last 30 days was 74% of our base volume (vs. 77% in the prior period) ranging from a low of 23% to a high of 113%. The average yield on the FN30 RNY in this period was 4.402% (vs. 4.541% in the prior period) ranging from a low of 4.283% to a high of 4.515%.

– Bopha Sok