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Upcoming Conferences

Several Compass sales directors and zovirax 400mg account managers will be attending the following conferences in the next few weeks. If you are attending and would like to set up a meeting to discuss Compass Analytics’s tools, functionality, or partnership, please email Phalla Sok.

2018 MBA of Florida Annual Conventio​n: June 20 – June 21 | St. Petersburg, FL
2018 California MBA Western Secondary Market Conferenc​e: July 16 – 18 | San Francisco, CA

Market Update

The Treasury yield curve remains relatively flat. The 2-10 year spread is currently 45bps (vs 44bps in last month’s market update) and has been range bound between 36 to 53bps for the past month. The market is anticipating a 25bps rate hike in the Fed Funds rate on June 13, 2018.

The US economy continued to add jobs at a strong rate in May, with nonfarm payrolls up 223k and the unemployment rate falling to 3.8% – April 2000 was the last time the unemployment rate was this low. Another measure of unemployment that adds in discouraged workers and those holding part-time positions for economic reasons fell to 7.6 percent, the lowest since May 2001. A 0.1-point decline in the labor force participation rate to 62.7 percent, tied for the lowest level in 2018, contributed to the unemployment rate decline. The closely watched average hourly earnings metric rose 0.3 percent, as expected. That translates to an annualized rate of 2.7 percent, up 0.1 point from April. In addition to the better than expected payrolls for May, March’s count was revised up from 135,000 to 155,000 while April declined from 164,000 to 159,000, for a net gain of 15,000.

Over the past couple of weeks, the market saw rate and spread volatility related to political events in Italy. Similar to other times of trouble overseas, US bonds still enjoy haven status. In this case, the political issues in Italy caused Treasury rates to drop, which ended up lowering US mortgage rates, which in turn benefits the US housing market and mortgage credit investors. Thanks to Italy, US homebuyers and refinancers just got a 20 bps market rate cut in the past couple of weeks.

Ginne Mae (GNMA) has recently made the headlines. On May 30, 2018, GNMA and the VA implemented language from bill S.2155, which passed Congress on May 24, 2018. All loans with application dates after May 25, 2018, must meet refi test provisions to be eligible for VA guarantee and pass a 210 day seasoning test – a borrower must have six consecutive monthly payments on the loan being refinanced (loan is current for at least 6 months) and the first payment due date of the refinanced loan occurs no earlier than 21- days after the first payment due date on the original loan. This could have significant implications for originators who have already certified loans that may not meet the new requirement. Originators who have already certified loans for June pooling that do not meet the new rules may be forced to buy the loans out of the pools. Because investors have already been buying portions of the June multi pools that originators have sold forward, the entire secondary market could have issues if originators are forced to remove loans from the multi pools. While this is unlikely to have a major impact on the GNMA market, it could be a big issue for small non-bank originators because these loans may never be eligible for multi pools.

On Friday evening, 6/1/2018, GNMA took steps to address the “churning” issue and announced restrictions on Freedom Mortgage, SunWest, and NewDay from being included in GNMA multi-issuer pools until at least January 2019. These actions could have a larger impact as a deterrent and zithromax prescription a precedent. By taking on one of their largest issuers, Freedom, GNMA demonstrated its intent to reign in questionable practices. In Q118, Freedom was the second largest GNMA originator and their loans typically make up 3-6% of monthly balances.

– 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 edged a bit higher in the month ending with June Class A notification as FNCL added 3 bps to close at 3.71% and our Conv 30Yr note rate landed at 4.99%, finishing the month 4 bps higher. Trust IOs were little changed with some mixed results as the 4.0 coupon ended a couple of bps lower on a jump in speeds while the rest of stack was up slightly. In TBAs, the 3.5/4.0 coupon swap came in about 1+ ticks wider while no changes were observed in the 4.0/4.5 swap nor FN/FG swaps. With the lack of volatility and an unchanged market we do not anticipate significant changes to BU/BD multiples as the Agencies reprice, though perhaps coming in a bit lower with the pick up in speeds.

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

– Virgil Caselli

Excess Primary-Secondary Spreads Color

We began May with FN30 MBS yielding 3.68% (FNCL) and borrowers paying 4.93% for a moving average excess primary-secondary (xPS) spread of 5 bps. FNCL finished down 10 bps at the end of the month but hit a high of 3.83% on 5/17 and a low of 3.5 on 5/29 during the course of the month.

During May, rates finished the month down approximately 10 bps with FNCL starting the month at 3.68 and finishing the month at 3.58. Throughout May, FNCL consistently trended upwards hitting a high of 3.83 on 5/17. Once hitting that high, FNCL trended downwards hitting a low of 3.5 on 5/29 before recovering a bit to finish the month at 3.58. This month as rates ticked down over the course of the month; many originators saw slight upticks in production but most originators remained slightly under capacity. Last month 21 lenders stated that they were under capacity with 5 replying they were significantly under capacity. This month were rates declining a bit, 6 originators states they were significantly under capacity and 15 were slightly under capacity. May saw continued improvement on the production front compared to April. 20 clients saw an increase in production compared to 16 in April. 8 of 28 clients did report that production was either flat or slightly down with 2 lenders responding they were significantly up in terms of production. With reports of production continuing to pick up and rates decreasing over the course of the month, reports of backlog remained consistent to last month with 4 of the 28 survey recipients stating they had small backlog. Rates dropping this month led to a pickup in excess margin. This month 10 clients have reported having a little extra margin back into their rate sheets compared to 8 clients last month.

We ended June 8th with FNCL at 3.70% and our moving average xPS spread at 8 bps. Next month, even if FNCL bucks course and try kamagra for free 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

This past Wednesday the Federal Reserve raised Federal Funds Rate by .25 percent to 1.75 percent. This move was priced in the market at 100 percent and markets were unphased. Market participants were focused on Federal Reserve President Jerome Powell’s comments during his new conference, following the rate hike. During the news conference, President Powell indicated there is room to grow: “The economy has strengthened so much since I’ve joined the Fed, really, the decision you see today is another sign that the U.S. economy is in great shape, growth is strong, the labor market is strong, inflation is close to target. That’s what you’re seeing.” Despite President Powell’s vote of confidence, traders were little moved by his optimism. Two more rate hikes in 2018 would translate to a Federal Funds Rate of 2.25 – 2.50 percent, however, traders implied only a 55 percent chance of the December hike. Looking forward, unemployment is a key metric to focus on. Market participants will look for data that indicates a tightening in the projected unemployment rate versus the “natural” unemployment rate. The “natural rate” of unemployment: the lowest jobless rate it thinks is consistent with stable inflation. As long as the unemployment rate is below the “natural rate”, inflation will tend to go up, which is the principle tenant of the ‘Philips Curve’. As we look forward, participants should pay attention to the underlying metrics of the unemployment rate as these will often have a direct impact on the Federal Funds Rate decisions.

Of note, pay-ups experienced a decreases across all coupons for the FN30, but pay-ups for the FN15 pools were flat for the month except for the 4.0 coupon, which saw dramatic decreases. The FN30 4.5 coupon saw a decrease in the 125k pool, -7/32, while all other pools saw marginal decreases between -1/32 to -7/32. Pay-ups for the FN30 4.0 coupon, decreased 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 110K pool saw the greatest decrease, -31/32, while the 125k and 150K saw a decreases of -27/32 and -22/32 respectively.

– Brendan McPartland

MSR Rich/Cheap & Mandatory/Best Effort Spread

Bond prices rose modestly in May, but we have given up most of these gains in early June leaving rates relatively unchanged, and during this time we’ve seen an increase in MSR Rich/Cheap IRRs, and a widening of Gross Profit Margins and the Best Efforts to Mandatory spread relative to last month. MSR values have seen an increase for the second consecutive month as aggregators weaken their bid for servicing assets. The average IRR value in May was 7.57%, a +0.59% increase compared to the April readings, with a peak value of 8.48% and a low value of 5.63%. In May we observed a widening of the Conventional Best Effort (BE)/Mandatory Spread and the Profit Margins relative to last month. The peak BE/Mandatory Spread value was 41 bps and the trough was 25 bps, with an average value of 34 bps, which is a 1 bps increase from our April readings. Profit Margins displayed an average reading of 204 bps (an 11 bps increase relative to last month) with a peak of 223 bps and a trough of 189 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 June 8, 2018, increased while rates traded in the wider range (22 bps range in this period versus 21 bps in the prior period), with the average yield increasing month over month by 4 bps. Average volume for the last 30 days was 108% of our base volume (vs. 96% in the prior period) ranging from a low of 71% to a high of 168%. The average yield on the FN30 RNY in this period was 4.225% (vs. 4.182% in the prior period) ranging from a low of 4.120% to a high of 4.344%.

– Bopha Sok