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Investments

BofAML: Subprime currently best performing private mortgage bond

Prices are up about one to two points over the last two-week period in subprime, which continues to be the best performing sector in non-agency mortgage-backed securitization, according to analysts of Bank of America Merrill Lynch (BAC).

Given the increased demand of the open-ended third round of quantitative easing program and the recovery in housing has driven into the sector, this supply will be well-received and not prevent further tightening. 

"The elevated prices has not prompted any large-scale profit taking as many market participants anticipate further appreciation in the early part of next year. Looking forward, we anticipate that additional supply will come to the market in the first quarter of 2013," said analysts Ryan Asato and Justin Borst at BofAML in the report.

Click on the chart to view non-agency prices, specifically subprime activity.

The Federal Reserve announced on Dec. 12 that rates will remain unchanged during the close of the Federal Open Market Committee, meaning Operation Twist will expire at the end of the month.

Although the Committee will continue to purchase additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee expanded its purchase of long-term Treasury securities after the maturity extension program is completed at the end of the month at a pace of $45 billion per month. As a result of the Fed buying more securities, people will sell more. 

About $7.7 billion in non-investment grade bonds and $0.3 billion in investment grade paper traded through Thursday, roughly 20% declined in volume from last week, according to TRACE data.

Click on the chart to view the non-agency paper activity.

As investors take off for the holidays, activity will continue to decline over the course of the next several weeks. 

Timeline extension remained a major concern for non-agency MBS investors, accelerating the speed at which loans are cleared from the foreclosure pipeline is a "clear positive for bond performance." 

Major bank repossessions increased about 11% in November from last month, the first year-over-year increase in real-estate owned properties since October 2010.

"We remain constructive on non-agencies, and maintain our preference for last cashflow subprime, which stands to benefit most from the recovery in home prices," the report stated.

Given the looming fiscal cliff, any short-term weakness as a result of the cliff is seen as a buying opportunity for investors.

While non-agency RMBS accounted for a small fraction of what it was at the peak of the market, the primary market for non-agency securitizations gained momentum this year.

For example, Redwood Trust (RWT) was the dominant victor in the sector, with the most activity, issuing six of the nine jumbo securitizations for the year.

The REIT could possibly double its production of jumbo-mortgage securitization in 2013, but no official statement has been released, Redwood Trust told HousingWire. 

The firm plans on ramping up its non-agency production and issue $300 million or more in private-label securitizations a month.

"Heading into 2013, several other firms in the industry have filed shelf registrations this year with intentions of securitizing new originations," BofAML stated.

cmlynski@housingwire.com

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