Uncategorized

Collateral trends in the new non-agency

admin | January 18, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

The new private label market is not only growing, it is evolving. An analysis of different shelves over time shows even within a given issuer’s program, the composition of collateral can change fairly meaningfully. Not surprisingly, shelves the market considers prime tend to show a relatively stable collateral profile. The others, not so much.

While it seems the new non-agency market has a myriad of euphemisms to describe loans that are being securitized, the reality is they are distinguished by a few things: their loan credit quality, their loan size and eligibility for agency MBS securitization, and by features that determine if the loan is a Qualifying Mortgage. These criteria help filter the current universe of new non-agency loans into a handful of categories, and those categories help distinguish the most active non-agency MBS issuers from each other. While the market often brands a deal, shelf or issuer as simply ‘prime’ or ‘non-QM’ the reality is that the new non-agency is rarely homogeneous and that investors may be exposed to multiple different types of loans in a single transaction. Given this, we offer an alternative to these often inaccurate monikers.

The universe of new non-agency loans falls into a handful of categories[1]:

Prime agency conforming
Prime jumbo agency conforming
Prime jumbo non-agency
Prime non-QM
Non-prime non-QM

Applying this taxonomy allows us to compare shelves within a given market convention like prime or non-QM as well as observe how deals within a given shelf might be changing over time. Starting with prime shelves the major noticeable trend is the pronounced increase in jumbo conforming loans being securitized in private label deals. However this phenomenon is far more pronounced in JP Morgan’s JPMMT shelf than in Redwood’s SEMT shelf. (Exhibit 1)

Exhibit 1: Loan level taxonomy across prime major shelves

Source: Amherst Insight Labs, Amherst Pierpont

The JPMMT shelf is also seeing a growing concentration of conforming balance loans being securitized – a phenomenon completely absent from Redwood securitizations. Additionally, based on this taxonomy, it appears there is modestly greater risk layering in the JPMMT shelf where non-prime loans, which we define as below a 700 FICO, non-QM loans make up nearly 5% of the pool in some more recent transactions.

Turning to expanded prime, we look at the Flagstar, Galton and Redwood’s ‘CHoice’ program. Looking across the three shelves illustrates how different shelves that are characterized by the same broad designation can be. While all three shelves contain a meaningful amount of prime jumbo non-conforming loans, those percentages can range anywhere from 16% to 75% even within a given shelf. Flagstar’s FSMT shelf appears to have the most diverse collateral mix of the three issuers. The Flagstar program is really more of a hybrid program, securitizing everything from hyper-prime jumbo loans to 100% investor pools. Flagstar stands out from other issuers given their large and steady population of conforming balance loans in their deals. They also have the smallest, albeit growing, population of non-prime non-QM loans. Looking at collateral trends across the other issuers, the population of prime non-QM loans in Galton’s GFMT shelf has grown steadily over time as the population of non-prime loans has decreased, an apparent credit positive. The population of non-prime non-QM loans has decreased in Redwood’s SEMT CH shelf as well, with those loans being replaced by a combination of agency conforming and jumbo conforming loans. (Exhibit 2)

Exhibit 2: Loan level taxonomy across major expanded prime shelves

Source: Amherst Insight Labs, Amherst Pierpont

Looking at non-QM issuers shows that label to be a pretty stark misnomer albeit in varying degrees. The population of non-prime, non-QM trusts tends to vary substantially across issuers and trusts with the population of those loans decreasing across some issuers and increasing across others over time. One caveat to this is that the taxonomy is derived from Loan Performance data and this data is unavailable for certain later 2018 vintage transactions, making it more difficult to ascertain the more recent trajectory of collateral trends across affected shelves.

One shelf where we do have a complete picture of collateral trends is Angel Oak’s AOMT shelf. Over time the population of non-prime, non-QM loans has steadily decreased, generally being replaced by higher balance prime loans. This trend should be a credit positive for later vintage Angel Oak deals, although given the deleveraging and benign credit performance of earlier vintage deals this change may only be modestly impactful. Caliber’s COLT shelf tends to have fairly limited variability in the composition of its collateral over the life of issuance. Non-prime, non-QM loans tend to vary somewhat and increased into the latter half of 2018. Those loans made up roughly 45% of the issuer’s 2016-3 transaction and 60% of their 2018-3 deal. The increase in non-prime, non-QM loans has been at the expense of smaller concentrations of prime conforming and jumbo conforming loans. Both the Angel Oak and Caliber shelves contain smaller populations of the Deephaven and Verus non-QM shelves which are generally marked by consistently larger populations of non-prime loans.

[1] For a detailed description of the taxonomy see APS Portfolio Strategy: The emerging non-agency MBS market landscape, September 21, 2018

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.