Residential & Consumer Debt
After recording the widest spreads since the global financial crisis (GFC), the mortgage- and asset-backed sectors rebounded considerably from late March due to increased liquidity and better-than-expected data through the second quarter, along with relatively broad-based risk-on sentiment across the financial markets. At the end of June, spreads had tightened significantly but remained wide of pre-COVID-19 levels, reflecting the ongoing uncertainty around regional reopening plans and federal stimulus as well as their impact on employment.
In the RMBS sectors, including Credit Risk Transfer (CRT), the spread recovery began in April at the top of the capital structure, and by June, spreads for assets lower in structure had materially tightened as well. Similarly, senior ABS tranches were the first to rally, particularly on the heels of the Federal Reserve’s announcement of TALF, a GFC-era lending facility for some senior ABS. By the end of the quarter, demand was visible lower in the capital structure, as participants were looking for yield in the ongoing low interest rate environment.
Tighter secondary spreads brought issuers to market beginning in May across a range of residential sub-sectors: Non-QM, Non-/Re-Performing, Prime Jumbo, Single-Family Rental, and CRT. Non-QM accounted for the bulk of the RMBS issuance, as issuers sought to capitalize on rebounding spreads and investor demand. CRT issuance included the first benchmark deal from Freddie Mac since March and a deal from a mortgage insurer; both were well oversubscribed. The quarter’s RMBS issuance totaled $8.2 billion, well below first quarter and year-ago levels of around $30 billion. ABS new issuance was mostly comprised of Auto ABS followed by Equipment and Student Loans, and like RMBS, deals were often well oversubscribed given limited supply. New issue ABS activity totaled $34.9 billion in the second quarter, far less than $50.5 billion in the first quarter and $69.4 billion a year ago.
Renewed primary issuance and tighter spreads are welcome developments, but spreads for most RMBS and ABS sub-sectors remain wide of pre-COVID-19 levels, as uncertainty hangs over the market, reflecting a wide range of potential outcomes. In the months following the outbreak of COVID-19, mortgage payment forbearances and consumer relief have largely been within the market’s initial expectations, helping fuel the spread rally. Home prices have been well supported given very strong demand and limited supply in the marketplace. Government stimulus through the CARES Act and various payment relief programs has helped maintain a level of continuity that has been critical to the performance of consumer assets in particular. As of the time of this writing, the risks created by the expiration of government stimulus, i.e., enhanced unemployment benefits, at the end of July are certainly priced into the markets.
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In June, credit card borrower payments exceeded levels in each of the prior two months, which had already been year-to-date bests.
The new issue markets have come back to life, with almost $40 billion in ABS and over $10 billion in RMBS pricing in Q2.
Through the end of June, the percentage of pending home sales that were delisted within two weeks soared past 2018 and 2019 levels to over 45%.
Total forbearance usage started to inch lower at the end of June, with third-party data providers suggesting that some of the forbearances are in the process of being worked out into deferrals and modifications.