Residential & Consumer Debt

Spreads for securitized residential debt sectors were firm during the third quarter, as most Credit Risk Transfer (CRT) tranches tightened 10-20 basis points and other sectors—such as non-QM and legacy mortgages—were mostly little changed. Consumer spreads were more varied, as AAA tranches were unchanged to a little wider, while subordinate tranches remained well-bid and tightened during the quarter. Despite relatively contained spread movement, many of the same themes that have supported RMBS and ABS persisted during the quarter, including favorable collateral fundamentals, record-high home prices, demand for yield, and continued employment gains. Year-to-date, residential and consumer sectors are mostly tighter, led by legacy mortgages, down-in-credit CRT, and lower-credit or esoteric asset-backed sectors.

Issuance of new RMBS fell approximately 15% from the second quarter to $46 billion, mostly due to a decline in re-performing securitizations, which offset a sharp increase in agency-eligible securitizations. The latter rose from $3.3 billion in the second quarter to nearly $10 billion in the third quarter, and non-QM issuance moderately increased to $6.9 billion. Quarterly issuance of ABS was $77 billion, in line with the prior quarter but comprised of a different mix of sectors, with more auto and student loan issuance. Year-to-date RMBS issuance totaled $140 billion, rising 66% from year-ago levels and 43% from the first nine months of 2019. Year-to-date issuance of ABS came to $217 billion at the end of the quarter, up nearly 50% from year-ago levels and 16% higher than year-to-date 2019. Comparisons to 2020 are considerably skewed by the issuance lull immediately following the outbreak of the pandemic.

Favorable mortgage and consumer debt collateral fundamentals have helped sustain strong demand for the sectors. In particular, the accrual of excess savings from various federal stimulus payments have aided debt service. Additionally, the crossover effects of payment accommodations on other consumer debts and strong collateral prices have limited losses.

Home prices continued to reach higher levels during the quarter, setting a record high in both the absolute level as well as annual appreciation—the latter of which was nearly 20% in July, according to S&P/CoreLogic Case-Shiller. That reading was mirrored by the Federal Housing Finance Agency’s index, which rose 19.2% in July versus year-ago levels. As noted last quarter, persistently strong demand against limited supply of available homes has been the driving factor for rising home prices. Mortgage credit availability has tightened around 30% from 2019 and is more consistent with underwriting during 2014, according to the Mortgage Bankers Association. Used vehicle prices, as measured by the Manheim indices, rose 27% year-over-year to reach a record high in September, benefitting from limited new inventory and supply chain disruptions.

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Mortgage and consumer new issue markets were active during the third quarter of 2021.

Monthly credit card payment rates rose during the pandemic and remain at elevated levels.

Modifications are expected to comprise a greater share of forbearance workouts as GSE forbearances reach their 18-month expiration.

Home price appreciation through 2021 has been more accelerated than any year since 2000.

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AG Capital Markets Perspectives (“CMP”) provides our portfolio managers’ views on the credit, real estate, and private equity markets. To access this quarter’s CMP and past quarterly reports, please complete the form below.

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