Residential & Consumer Debt

Spread tightening for most securitized residential and consumer debt sectors extended through the second quarter and was sustained by the same factors we have discussed over the last several quarters, including stellar collateral fundamentals, sharply higher home prices, demand for yield, and the ongoing employment recovery. Spreads for most mortgage sub-asset classes finished the quarter inside of February 2020 levels, including AAA tranches of re-performing and non-qualified mortgage securitizations—which were around 15 basis points tighter—and mezzanine Credit Risk Transfer (CRT) tranches, which were up to 20 basis points tighter. A few legacy RMBS sectors and subordinate tranches of CRT remained up to 20-30 basis points wide of pre-pandemic spreads at quarter-end. Most ABS asset classes are up to 40 basis points inside of their pre-pandemic tights, with the notable exception being aircraft ABS.

Issuance of new RMBS rose 35% from the first quarter to over $40 billion, largely due to prime and agency-eligible issuance, which nearly doubled to $16.5 billion. Issuance of non-qualified mortgages and CRT rose 36% to $6 billion and 20% to $6.7 billion, respectively. Quarterly issuance of ABS was $76 billion, approximately 21% higher than the first quarter on rising other/esoteric volume. RMBS volume in the first half of 2021 totaled $70 billion and was around 11% higher than the same period in 2019; ABS volume exhibited a similar trend, totaling $140 billion in the first six months of 2021—a 6% increase from the first two quarters of 2019. Note that comparisons to the first half of 2020 are considerably skewed by the issuance lull immediately following the outbreak of the pandemic in the U.S.

Mortgage and consumer debt collateral fundamentals have been strong through the pandemic, supported by multiple recovery packages consisting of enhanced unemployment support, federal stimulus payments, foreclosure/eviction moratoriums, and payment relief from mortgages and other consumer debts. However, some states have announced an end to extra federal unemployment payments, and other relief programs have already ended or will soon expire; mortgage and consumer debt fundamentals are likely to revert to pre-pandemic performance as programs finish.

Home price appreciation in housing markets across the country continued during the second quarter. The latest readings of home price indices from S&P CoreLogic Case-Shiller and the Federal Housing Finance Agency indicated national home prices rose around 15% year-over-year in April, with limited supply often noted as a driving factor. Redfin data show around 582,000 units for sale through the four-week period ending June 20th, as compared to approximately 888,000 and 1.1 million units at the same points in 2020 and 2019, respectively. As we noted last quarter, mortgage underwriting has been extremely tight and on par with levels in 2014, according to the Mortgage Bankers Association—a stark contrast to underwriting leading into the global financial crisis.

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Borrowers with 720+ FICO scores have represented a larger share of unsecured lending over the last few months.

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

The number of homes currently listed for sale is nearly 50% lower than the number of listings as of the 27th week of 2019.

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

Angelo Gordon’s Capital Markets Perspectives

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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