Compass News and amoxil Events
The past few weeks have been very busy for Compass Analytics as we prepared and released our code updates for both our pricing engine, CompassPPE™, as well as our pipeline hedging analytics, CompassPoint™. As lenders focus on improving execution, efficiency and cost control, Compass announced integration enhancements and upgraded mobile capabilities. Among the updates, CompassPoint™ has further enhanced its mobile responsive Pipeline Vitals platform to support enhanced bid tracking. For CompassPPE™, real-time API integration with three additional mortgage insurers has been implemented, meaning loan originators can now get real-time MI quotes directly from the engine.
Also, if you are attending any of the following industry events, we’d love to chat with you in person. If you 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 email@example.com.
The treasury yield curve remains flat / slightly inverted with the 2-10 year spread hovering around 17bps, flat vs one month ago. Routinely, many external factors affect the Treasury market, including another Federal Government shutdown, Brexit news coming out of the UK and the US-China trade war truce.
Job growth, as reported by the Labor Department on 2/1/19, in January shattered expectations. Nonfarm payrolls surged by 304,000 despite a partial government shutdown that was the longest in history. The unemployment rate ticked higher to 4%, a level where it had last been in June, a likely effect of the shutdown, according to the department. However, officials said federal workers generally were counted as employed during the period because they received pay during the survey week of Jan. 12. On balance, Federal Government employment actually rose by 1,000. Economists surveyed had expected payrolls to rise by 170,000 and the unemployment rate to hold steady at 3.9 percent. The news was not all good, though, as data revisions pushed previous numbers lower. December’s reported gain of 312,000 was knocked all the way down to 222,000, while November’s rose from 176,000 to 196,000. On net, that took the two months down by 70,000, bringing the three-month average to 241,000. That’s still well above the trend that would be common this far into an economic expansion dating back 9½ years.
The market is pricing in a 0% chance that Fed raises rates in March 2018. Given continued dovish comments from Fed Chair Powell and other Fed Governors, the general consensus has shifted from 3 or 4 Fed rate hikes in 2019 to the possibility of 1 hike in 2019, with a pause likely until later in the year.
The Trump administration’s nominee to serve as director of the Federal Housing Finance Agency, Mark Calabria, is set to testify on February 14, 2019 before the Senate Banking Committee. The nomination hearing could provide an important window into the White House’s plans for a future housing finance system, including how reforms might be carried out. He will likely have to convince lawmakers that Congress still has a role in reforming the GSEs’ if he hopes to secure his confirmation. Before joining the Trump administration as Vice President Mike Pence’s chief economist, Calabria was the director of financial regulation studies at the Cato Institute, where he regularly advocated for constraining the footprint of Fannie and Freddie.
Coming soon is a fast-approaching deadline when a huge chunk of Fannie Mae and Freddie Mac’s loans could be in violation of federal underwriting requirements. While the White House and Senate Banking Committee are pursuing parallel tracks to end the GSEs’ federal conservatorships, any resulting plan must deal with whether GSE-backed mortgages are still exempt from the Consumer Financial Protection Bureau’s Qualified Mortgage rule. The exemption, known as the GSE “patch,” ends in January 2021 or when the conservatorships end, whichever comes first. Unless the patch is extended or the CFPB eases underwriting requirements for all loans, nearly a third of loans backed by the GSEs could face new legal liability. Other government-backed loans such as those insured by the Federal Housing Administration have a similar exemption.
Initially proposed by the FHFA in May 2014, the Single Security Initiative is scheduled to be implemented on June 3, 2019. This multi-year effort by the FHFA, Fannie Mae, Freddie Mac, and countless other industry stakeholders will likely represent one of the most significant developments in the agency MBS sector in years. Creating a single TBA market that will allow investors to freely trade either Fannie Mae or Freddie Mac mortgage-backed securities in a fungible form is likely to enhance liquidity in the TBA market as the two GSEs’ floats are combined. Additionally, this can also eliminate or at least materially reduce the market-adjusted pricing (subsidy) that Freddie Mac currently provides to lenders to pool their loans with Freddie instead of Fannie and pave the way for future GSE reform by allowing new entrants to enter the MBS guarantee business.
– Jason Freydberg
Rates kept moving lower in the month ending with February Class A notification though at a more measured pace versus the prior month. FNCL shed 12 bps to finish the month at 3.44% while our current note rate played some catch-up, shedding 16 bps to 4.83%. Trust IOs were off about three quarters of a point on average, bringing multiples down about 18 bps. In TBAs, the 3.5/4.0 swap was 6 ticks tighter and 4.0/4.5 swap was 3 ticks tighter while no change was observed in 4.5/5.0 swap. With the measured pace of the rally and relatively light coupon compression we do not expect the Agencies to diverge much from Trust IO ratios as they reprice BU/BD Mults.
*IO price source – Bloomberg ALLX IOFN (4.25 interpolated from 4.0, 4.5 coupons)
– Virgil Caselli
Excess Primary-Secondary Spreads Color
We began January with FN30 MBS yielding 3.51% (FNCL) and borrowers paying 4.98% for a moving average excess primary-secondary (xPS) spread of 16 bps. FNCL finished down 11 bps at 3.40% at the end of the month hitting the high of 3.59% on 1/18 and a low for the month of 3.51 on 1/31.
During January, rates finished the month down approximately 11 bps with FNCL starting the month at 3.51 and finishing the month at 3.40. FNCL started the month at 3.51 and then declined a bit hitting a 6 month low of 3.46 on 1/4. FNCL bounced back after that steadily rising until hitting the January monthly high of 3.59 on 1/18. FNCL hovered around the 3.59 area until dropping precipitously to 3.40 on 1/31. 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 seasonality. Last month 25 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 10 slightly under capacity. Some lenders did have upticks in production with 5 lenders stating they were at capacity compared to 2 last month and 2 lenders stating they were over capacity compared to 0 last month. January saw a moderate increase in production in comparison to December. 16 clients saw a small increase in production compared to 9 in December. 12 of 28 clients reported that production was either flat, slightly down or significantly down compared to 19 clients last month. With reports of flat to slightly up production compared to November, reports of backlog increased slightly compared to last month with 5 survey receipts stating they had small backlog compared to 4 last month. Despite rates decreasing this month, reports of excess margin decreased a bit. This month 7 clients reported having a little extra margin in their rate sheets compared to 8 clients last month.
We ended February 12th with FNCL at 3.47% and our moving average xPS spread at 15 bps. Next month, even if FNCL bucks course and trends upward again we are expecting to see xPS decrease and move closer to the 10-12 bp range as the recent drop in rates was large enough to create pro longed periods of excess margins.
– Mike Vough
Specified Pool Commentary
Minutes from Federal Reserve’s January meeting will be released on Wednesday, which will give market participants their first clues how the central bank plans to proceed for 2019. Specifically, investors are hoping to learn more about the Fed’s about-face in policy when they signaled a more “patient” Fed moving forward. A sign the Fed is serious about transparency moving forward, Federal Reserve Chairman Jerome Powell will hold news conferences after each meeting to explain the actions of the Fed. While communication about future rate hikes is well documented, participants seek more transparency about shrinking the balance sheet. Clarity on both topics would ease participant concerns moving forward.
Payups varied across securities and coupons for the month of February. Lower coupons saw payups that were flat or increased month over month whereas higher coupons experienced decreasing payups month over month. Data suggests a demand shift from higher coupons to lower coupons on a month over month basis. The FN30 4 coupon saw increased payups of 1/32 – 2/32 across all pools, whereas the FN30 5 coupon experienced decreased payups of roughly -5/32 to -10/32. The opposite held true for FN15 securities. Lower coupons had no change month over month, while higher coupons experienced increased payups. The FN15 4 and 4.5 coupons had increased payups ranging from 3/32 – 8/32.
– Brendan McPartland
Rates have been trending slightly lower during January and into February as bond prices rise with the average FN30 CC approximately 1/8th lower than last month’s readings, and during this time we have seen an increase in MSR Rich/Cheap IRRs and Gross Profit Margins while the Best Efforts to Mandatory spread has tightened. MSR values have increased in January as aggregators weaken their bid on servicing assets. The average IRR value was 7.27%, a +0.35% increase compared to the January readings, with a peak value of 8.28% and a low value of 6.48%. In February we observed a widening of Gross Profit Margins while the Conventional Best Effort (BE)/Mandatory Spread tightened relative to last month. The peak BE/Mandatory Spread value was 47 bps and the trough was 31 bps, with an average value of 38 bps, which is a 1bps decrease from our January readings. Profit Margins displayed an average reading of 207 bps (+6 bps increase relative to last month) with a peak of 245 bps and a trough of 182 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 in the 30-day period ending February 14, 2019, increased while rates traded in a tighter range (19 bps range in this period versus 36 bps in the prior period), with the average yield decreasing month over month by 8 bps. Average volume for the last 30 days was 69% of our base volume (vs. 63% in the prior period) ranging from a low of 48% to a high of 99%. The average yield on the FN30 RNY in this period was 4.046% (vs. 4.128% in the prior period) ranging from a low of 3.948% to a high of 4.134%.