HMBS continues to be well bid in early 2013 with spreads lingering around the tights of 2012. Fixed-rate HMBS trades in the context of 55 to swaps for corporate settle. With the recent announcement of the discontinuation of fixed-rate Standard HECMs (for the time being), buy-side account interest has remained strong. Floating-rate HMBS spreads have widened several basis points but are still within striking distance of the tights set in 2012. That said, many market participants want to see how the production mix shakes out once the fixed-rate Standard pipeline runs dry. There are thoughts that things will shift to a higher utilized floating-rate Standard and fixed-rate Saver marketplace. Some of the recent widening may be attributed to the prospect of increased supply coming down the road, however, the market for floaters is well defined and relatively mature as there’s been several billion structured into HREMICs since 2009. In December we saw more than $400 million in HREMICs brought to market by Knight and BAML, down from more than $800 million in November.
Another potential concern is volume dropping even further by eliminating the fixed-rate Standard. However, a case can be made that this move may have a negligible effect on industry volume (as measured by number of units). Directionally, fixed-rate Standard borrowers will be shifted to the floating-rate Standard and the fixed-rate Saver. Industry reports have indicated that approximately 10 to 15 percent of borrowers claim to “need” all of their available funds upfront, and these borrowers will still be able to utilize the full-draw, floating-rate Standard option. Saver loan-to-value ratios are 15 to 20 percent lower than the Standard and you can expect the origination mix to be more balanced now between the Saver and the Standard.
Historically, the prepayment profile of Savers has been more volatile than that of Standards due to pool sizes and borrower characteristics. Two themes may factor into how Saver 2.0 pools will price:
We may see the removal of the selection bias (i.e., roughly 95 percent of these pools will comprise typical Standard borrowers), which would suggest a prepayment profile that resembles what we see today with the Standard (slow, stable, predictable).
However, some say borrowers who take out a new fixed-rate Saver will be immediately contacted to refinance into the floating-rate Standard. Net-net, pools will trade at a concession to current fixed-rate Standard and that level will be determined shortly.
