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Upcoming Conferences

One of the biggest industry conferences is coming up next month, and we are excited to attend and cheap pills cialis reconnect with everyone at hte MBA Annual Convention in Washington DC. 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.

In addition, we will be also be at the following events:

Freddie Mac Connect: September 23 – 25 | Chicago, IL
2018 Pacific Northwest Mortgage Lenders Conference: September 23 – 25 | Seattle, WA
2018 MBA of the Carolinas Annual Conference: October 1 – 3 | Asheville, NC
Mid-Atlantic Lender Conference: October 3 | Falls Church, VA
2018 MBA Annual Convention: October 14 – 17 | Washington, CC

Market Update

The treasury yield curve remains flat with the 2-10 year spread currently equal to 27bps. For the past month, the 2-10 spread has been tightly range bound between 16 to 29bps with the market pricing in a 99% chance that the Fed raises rates another 25bps on September 26, 2018. Furthermore, there is currently an 82% probability the Fed will raise rates another 25bps on December 19, 2018.

Recently, we have seen strength in the broader markets with the S&P 500 inching higher and closing in on the peak from late August. Corporate credit and securitized product spreads continue to grind tighter and economic fundamentals are stable with softer inflation data showing both core CPI and PPI only edging up 0.1% month over month. This data supports the view that the move up in inflation will be gradual and that a spike higher is unlikely. At the same time, recent comments from Fed officials have hovered between neutral and hawkish, suggesting the Fed will remain on its gradual pace of tightening and canadian pharmacy viagra potentially allow the fed funds rate to rise above the neutral rate, barring a shock to financial markets or the economy.

As the market continues to seek clarity on the trade war front, one of the biggest risks to the fixed income markets, it appears a major escalation may materialize any time soon. With the midterm elections approaching, common sense suggests this will mitigate itself as we get closer to these elections. The Treasury secretary’s attempt to restart talks with Beijing is a positive sign for the markets, but President Trump appears to prefer to handle things differently. While the President has instructed his team to proceed with another $200bn tariffs in Chinese goods regardless (and the Chinese have said they would retaliate), there’s hope in the marketplace that these issues can be resolved before there’s no room for negotiation.

– 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 climbed at a measured pace over the course of the month ending with September Class A notification as FNCL was up 11 bps, closing at 3.76% and our Conv 30Yr note rate landed at 5.02%, finishing the month 6 bps higher. Trust IOs were up about 7 ticks on average with multiples up about 5bps. In TBAs, the 3.5/4.0 coupon swap came in about 2.5 ticks wider while the 4.0/4.5 swap was 1 tick wider and no changes were observed in FN/FG swaps. With the absence of volatility in rates and TBAs and minor changes in coupon swaps we expect the agencies to reprice BU/BD multiples slightly higher, in line with 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 August with FN30 MBS yielding 3.72% (FNCL) and borrowers paying 4.97% for a moving average excess primary-secondary (xPS) spread of 8 bps. FNCL finished down 10 bps at 3.62% at the end of the month but hit a high of 3.72% on 8/1 and a low of 3.58 on 8/20 during the course of the month.

During August, rates finished the month down approximately 10 bp with FNCL starting the month at 3.72 and finishing the month at 3.62. FNCL slowly but surely trended downwards over the course month starting the month at the monthly high of 3.72. FNCL drifted down to the monthly low of 3.58 on 8/20 before recovering a bit to end the month at 3.62. With rates trending down, some originators saw stagnation or a slight up tick in production but most originators remained under capacity. Last month 9 lenders stated that they were under capacity with 8 saying they were significantly under capacity. This month with rates decreasing a bit, 6 originators stated they were significantly under capacity, 2 moderately under capacity, and 11 slightly under capacity. August saw flat to small increases in production compared to July. 9 clients saw an increase in production compared to 8 in July. 19 of 28 clients reported that production was either flat, slightly down or significantly down. With reports of flat production compared to July, reports of backlog remained the same compared to last month with 4 survey receipts stating they had small backlog. With rates decreasing this month, reports of excess margin stayed effectively the same as well. This month 8 clients reported having a little extra margin in their rate sheets compared to 8 clients last month.

We ended September 14th with FNCL at 3.78% and our moving average xPS spread at 2 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 from a month or so ago wasn’t substantial enough to create enough additional volume to create backlog.

– Mike Vough

Specified Pool Commentary

Market participants eagerly await the Federal Reserve meeting on September 25th to confirm the widely held suspicion of another quarter-point rate hike. A quarter-point hike will take the target rate to 2 percent to 2.25 percenter, levels that have not been reached in over a decade. As the September hike is already accounted for, participants are questioning the rate and frequency of future hikes. Specifically, how will the Fed telegraph future moves. Chairman Powell must account for on-going trade wars, in addition to slowing of global growth. Despite political uncertainty, fed fund futures traders are assigning an 87 percent chance of a rate hike in December. Economists forecast a potential recession starting in 2020 as fiscal stimulus would have worn off and generic viagra cheap no prescription monetary tightening will have taken a serious toll on the economy. Chairman Powell must provide some clarity as to the direction of the Fed otherwise participants should expect an increase in volatility over the next few quarters and potentially years.

Of note, pay-ups experienced slight decreases across all coupons for FN30, but pay-ups for FN15 pools were relatively flat for the month except for the 4.0 coupon, which experienced slight decreases. The FN30 5.0 coupon saw the largest decreases across all pools. The 125k pool and 175k pool saw the largest decreases as both pools lost -11/32 and -7/32 respectively. Pay-ups for the FN30 4.5 coupon, experienced the greatest variance. All pools decreased by at least -3/32, whereas the 200k pools saw increases of 1/32. 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 experienced the greatest decrease in the coupon stack. The 125k pool and 150k pool decreased by -5/32, while the 110k pool decreased of -4/32.

– Brendan McPartland

MSR Rich/Cheap & Mandatory/Best Effort Spread

Bond prices rallied modestly during August, but they have sold off during September giving up most of these gains, and during this time we’ve seen a decrease in MSR Rich/Cheap IRRs and Gross Profit Margins and a slight widening of the Best Efforts to Mandatory spread. MSR values have seen a slight decline in September as aggregators improve their bid on servicing assets. The average IRR value was 7.97%, a -0.11% decrease compared to the August readings, with a peak value of 9.71% and a low value of 5.53%. In September we observed a widening of the Conventional Best Effort (BE)/Mandatory Spread while Profit Margins tightened relative to last month. The peak BE/Mandatory Spread value was 44 bps and the trough was 32 bps, with an average value of 38 bps, which is a 2 bps increase from our August readings. Profit Margins displayed an average reading of 203 bps (a 2 bps decrease relative to last month) with a peak of 222 bps and a trough of 184 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 September 14, 2018, decreased while rates traded in a wider range (15 bps range in this period versus 12 bps in the prior period), with the average yield decreasing month over month by 0.01 bps. Average volume for the last 30 days was 86% of our base volume (vs. 98% in the prior period) ranging from a low of 65% to a high of 132%. The average yield on the FN30 RNY in this period was 4.195% (vs. 4.205% in the prior period) ranging from a low of 4.136% to a high of 4.284%.

– Bopha Sok