HMBS spreads have been grinding tighter in early June amid a steady interest rate selloff. Annual LIBOR HMBS is trading in the mid-teens DM (discount margin) with a $112 price and a 2.7 percent yield. Almost 100 percent of this production is being sold in HREMIC form with par-priced floaters moving in the high 50s DM.
Annual Libor production is closing in on 90 percent of all adjustable-rate production, which is a complete 180-degree turn from 2014’s statistic, especially as it relates to 1-month Libor margin originations. That being said, new 1-month Libor indexed paper and seasoned Libor tails trading in the 30s DM are being stripped to par and moving in the high 40s/low 50s DM and mid- to high- 30s DM, respectively.
Bank appetite for the par-priced floaters has remained firm during the course of 2015. Usually, bank buying is concentrated in the first half of the year and we’ll see if 2015 is any different.
With regard to fixed-rate HMBS, spreads have been steady at 40 to swaps. Prices have fluctuated between $112 and $115 based on the current level of interest rates (and they have been volatile in Q2). Banks have also been buying stripped-down pass-throughs in the 60-70 swaps context for a low premium. There have been several billion of secondary HMBS and HREMIC classes trading in Q2 at well-supported levels. There’s also been an influx of dealers into the sector with Barclays, Credit Suisse and the Royal Bank of Canada all actively participating across primary and secondary flows.
Prepayments have been quite the thorn in 2015’s side as two isolated occurrences have led to accelerated speeds and have left many market participants feeling uneasy. The 2013 PLF HECM 60 vintage was and continues to be churned in high volumes by loan officers and brokers. Speeds for the window of originations have created prepays/refis like no other time in HECM history. This refinancing pattern has caused massive pain for both HMBS and IO investors. The other dynamic that has caused elevated prepay activity and led to losses across the board for dealers and investors is early partial prepayments, where loan officers and brokers tell the consumer they will waive closing costs if the borrower draws more on their loan to maximize their gain on sale premium. They then tell the consumer they can pay it back in a month or two to create the loan-to-value ratio they initially wanted. The hope is the GNMA issuers are all enforcing premium recapture language in their Mortgage Loan Purchase Agreements.
