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Upcoming Conferences

Summer can be a slower time for conferences, but Compass Analytics representatives will still be out and about at a few in the upcoming weeks. If you are also attending and would like to set up a meeting to discuss Compass Analytics’s tools, functionality, or partnership, please email Phalla Sok.

The Mortgage Collaborative 2018 Summer Conference: August 19 – 21 | Chicago, IL

Market Update

As we head into Q3, the treasury yield curve continues to flatten. The 2-10 year spread is currently 25bps and has been range bound between 25 to 41bps for the past month. As expected, the Fed raised rates 25bps on June 13, 2018 and there is currently a 72% probability the Fed will raise rates another 25bps on September 26, 2018.

Historically, the government bond yield curve has been a very good indicator for predicting recessions, with an inverted yield curve being the most alarming indicator of an economic downturn. But, since the current economy is strengthening and not weakening, some, including the Fed, are starting to question whether looking at yields on a series of government bonds remains an effective forecasting tool. Minutes from the Fed’s June policy meeting showed that the Fed is considering an alternative approach to avoid the perceived shortcomings of using bond yields. With the Fed and cheap cialis daily other Central Banks purchasing large amounts of government securities after the ’08 financial crisis, it’s possible that those purchases continue to keep yields low.

The June unemployment report showed payroll gains of 213k, but the unemployment rate increased to 4% with stable wage growth. In addition, the payroll gains for May were revised up another 21k to 244k. The bigger story with this report was the increase in labor force participation, increasing to 62.9% from 62.7%. There were approximately 601k new entrants to the labor force in June. The increased participation combined with a lack of accelerating wage growth (average hourly earnings rose 0.2% in June) during June indicates a labor market that still has enough slack remaining to pull in new workers who had been disengaged from the workforce. A more encompassing measure of unemployment that includes discouraged workers and those at part-time jobs for economic reasons also rose two-tenths, to 7.8 percent. The June employment report, along with the onset of tariffs, likely puts the outlook for the Fed hiking cycle back in play, from one that baked in steady hikes.

Of note, last week Fannie Mae announced a new “Enterprise Paid Mortgage Insurance Option” (EPMI). The offering is similar to Freddie’s IMAGIN program, in that it allows originators of >80% LTV loans to secure the PMI required for a GSE guarantee without having to deal directly with an MI provider. Fannie will charge a higher LLPA and then source the source the PMI from a set of reinsurers and/or participating MI providers. Depending on pricing, the program could be an attractive offering for smaller originators, as it reduces the paperwork burden associated with standard lender paid insurance (LPMI). This may lead to broader availability of credit for borrowers who can only make small down payments. However, given that Freddie’s program has so far only had a modest impact, it’s not likely to have an immediate disruption from Fannie’s pilot.

– 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.

Rates were off over the course of the month ending with July Class A notification as FNCL was 9 bps lower, closing at 3.62% and our Conv 30Yr note rate landed at 4.93%, finishing the month 6 bps lower. With rates off, Trust IOs took a hit, off about a point on average in coupons surrounding current production. In TBAs, the 3.5/4.0 coupon swap came in about 6 ticks tighter while the 4.0/4.5 swap tightened 4.5 ticks and changes were observed in FN/FG swaps. With the measured decline in rates and Trust IO multiples lower we expect the Agencies to reprice August BU/BD multiples lower, in line with ratios to the Trust IO market.

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

– Virgil Caselli

Excess Primary-Secondary Spreads Color

We began June with FN30 MBS yielding 3.62% (FNCL) and borrowers paying 4.97% for a moving average excess primary-secondary (xPS) spread of 10 bps. FNCL finished down 11 bps at the end of the month but hit a high of 3.73% on 6/13 and a low of 3.59 on 6/28 during the course of the month.

During June, rates finished the month down approximately 1 bp with FNCL starting the month at 3.62 and finishing the month at 3.61. FNCL began the month trending upwards hitting a June high of 3.73 on 6/13. After that point, FNCL began to trend down hitting a monthly low of 3.59 on 6/28. With rates effectively remaining flat month to date, many originators saw slight declines in production and most originators remained under capacity. Last month 15 lenders stated that they were under capacity with 6 saying they were significantly under capacity. This month with rates staying flat, 6 originators stated they were significantly under capacity and 15 were slightly under capacity. June saw production increases tailing off compared to May. 11 clients saw an increase in production compared to 20 in May. 17 of 28 clients reported that production was either flat or slightly down. With reports of production increasing tailing off a bit compared to last month, reports of backlog remained consistent to last month with 4 of 28 survey recipients stating they had small backlog. With rates barely moving this month, reports of excess margin dropped as well. This month 7 clients have reported having a little extra margin in their rate sheets compared to 10 clients last month.

We ended July 10th with FNCL at 3.62% and our moving average xPS spread at 10 bps. Next month, even if FNCL bucks course and trends downward again we are expecting to see xPS decrease as the recent drop in rates wasn’t substantial enough to create enough additional volume to create backlog.

– Mike Vough

Specified Pool Commentary

On Wednesday, Federal Reserve Chairman, Jerome Powell, testified before Congress on the state of the economy. Chairman Powell reaffirmed the largely held belief that the Fed will continue to gradually raise rates. During his testimony, he cited a stronger economy, higher inflation and consistent unemployment figures as validation for future hikes, “Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently anticipate… The unemployment rate is low and expected to fall further. Americans who want jobs have a good chance of finding them”. Despite Chairman Powell’s upbeat comments, he warned trade tensions may derail such efforts. With uncertainty swirling around trade disputes, Chairman Powell warned against protectionism, “The bottom line is a more protectionist economy is… less competitive. It’s less productive, so it’s not a good thing if that’s where this goes”. Looking forward, participants will keep an eye on trade tensions as some fear countries will impose tariffs and other countermeasures as a retaliatory tactic.

Of note, pay-ups experienced slight increases across all coupons for the FN30, but pay-ups for the FN15 pools were relatively flat for the month except for the 4.0 coupon, which saw slight increases. The FN30 3.0 coupon saw the largest increases across all pools. The 125k pool and 150k pool saw the largest increase as both pools gained 5/32. Pay-ups for the FN30 4.5 coupon, increased across all spec pools by 1/32 to 4/32. There was relatively little month over month change across the 3 and 3.5 coupons for FN15. However, the FN15 4.0 coupon experienced significant changes across pool structures. The FN15 4.0 coupon 125K pool saw the greatest increase, 5/32, while the 200k pool saw an increase of 2/32.

– Brendan McPartland

MSR Rich/Cheap & Mandatory/Best Effort Spread

Bond prices have traded sideways over the past month, and during this time we’ve seen a decrease in MSR Rich/Cheap IRRs and a widening of both Gross Profit Margins and the Best Efforts to Mandatory spread relative to June’s observations. MSR values have pulled back in July as aggregators improve their bid on servicing assets. The average IRR value was 7.17%, a -0.40% decrease compared to the June readings, with a peak value of 10.12% and a low value of 5.88%. In July we observed a tightening of the Conventional Best Effort (BE)/Mandatory Spread and a widening of Profit Margins relative to last month. The peak BE/Mandatory Spread value was 46 bps and the trough was 27 bps, with an average value of 38 bps, which is a 4 bps increase from our June readings. Profit Margins displayed an average reading of 206 bps (a 2 bps increase relative to last month) with a peak of 221 bps and a trough of 187 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 July 17, 2018, decreased while rates traded in the tighter range (12 bps range in this period versus 22 bps in the prior period), with the average yield decreasing month over month by 4 bps. Average volume for the last 30 days was 103% of our base volume (vs. 108% in the prior period) ranging from a low of 69% to a high of 137%. The average yield on the FN30 RNY in this period was 4.180% (vs. 4. 225% in the prior period) ranging from a low of 4.133% to a high of 4.251%.

– Bopha Sok