Residential & Consumer Debt
The spread recovery for securitized residential and consumer debt persisted during the first quarter of 2021, supported by many of the same themes we have noted in our prior commentaries, such as demand for yield, strong collateral fundamentals that have benefited from stimulus, rising home prices, and the ongoing job recovery. Assets with longer duration or more credit risk—which are generally those with the widest spreads—outperformed during the quarter, leading to a flatter credit curve before front-pay, senior tranches, and legacy RMBS reversed some of their gains toward the end of the quarter.
At the end of the quarter, most mortgage sub-asset classes were up to 50-100 basis points wide of February 2020 levels, though a few pockets—such as newly issued AAA tranches of re-performing loans and non-qualified mortgages as well as certain subordinate tranches of single-family rental deals—ended the quarter inside of pre-pandemic spreads. Most consumer sub-asset classes finished the quarter inside of February 2020 levels, though certain sectors—such as aircraft ABS—remain outside of pre-pandemic levels.
New issue volume was notably stronger compared to the fourth quarter of 2020. The supply was well-absorbed by the market, as offerings were often well-oversubscribed—particularly at the beginning of the year. Compared to the prior quarter, RMBS new issues grew 38% to nearly $30 billion, and ABS issuance rose 71% to over $63 billion. Growth was more mixed year-over-year, as RMBS fell 14% due to Fannie Mae’s absence from the Credit Risk Transfer new issue market and less non-performing loan/re-performing loan RMBS issuance activity. On the other hand, ABS increased by 25%, led by auto and other/esoteric sectors.
Ongoing pandemic-related risks for the mortgage- and asset-backed sectors have been balanced against collateral fundamentals that have generally exceeded the market’s expectations from last March and April. As discussed in prior quarters, this was certainly supported by multiple recovery packages consisting of enhanced unemployment support, federal stimulus payments, and payment relief from mortgages and other consumer debts.
At the end of 2020, home price indices from S&P CoreLogic Case-Shiller and the Federal Housing Finance Agency pointed to an annual increase of over 10% for national home prices, and in its first reading of 2021, the Case-Shiller index rose to over 11%. The same factors we have often cited—such as limited supply of new and existing homes against strong demand—continued to drive home prices higher. However, underwriting remains markedly tight and consistent with levels in 2014, according to the Mortgage Bankers Association. This contrasts with the global financial crisis, during which loose underwriting was a key component of home demand.
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Mortgage payments as a percent of household income have continued to decline since last year.
New issuance volume returned to the elevated levels seen in Q3 2020.
Outstanding housing inventory continues to decrease, offering further support to housing prices.
Spending of stimulus recipients has outpaced that of non-recipients over the previous one- and two-year periods.