Residential & Consumer Debt

Spreads for mortgage- and asset-backed sectors extended their COVID-19 rebound from the second quarter. During the third quarter, Credit Risk Transfer (CRT) last cashflow and subordinate tranches were tighter by approximately 20-30 basis points. Similarly, ABS spreads were tighter for senior and subordinate tranches, as collateral fundamentals have been better than initial market expectations.

Better-than-expected data, liquidity, and relatively broad-based risk-on sentiment continued to support the rebound, yet spreads for most RMBS and ABS sub-sectors remain wider than pre-pandemic levels, as uncertainty over intertwined elements—including unemployment, stimulus, and upticks in COVID-19 cases—hang over the market. However, securitized credit is the largest asset class not directly supported by Federal Reserve purchases, which has created ongoing relative value compared to other fixed income asset classes. For example, CRT spreads remain 100-250 basis points wider than January levels, creating room for further spread tightening in the coming months.

In the third quarter, new issue RMBS activity was sharply higher at $26.8 billion, nearly doubling second quarter activity. This supply was met with strong demand, with subscription levels often multiples of the offered amounts. However, RMBS issuance is still down about 17% compared to year-ago levels—due in part to the lull in Non-QM activity following the outbreak of COVID-19—but is poised to rise in the coming quarters. ABS issuance rose 75% to $60.6 billion during the quarter, with Auto ABS accounting for over half of the third quarter’s issuance. For the full year, Credit Card ABS issuance has fallen to $3 billion from $23.7 billion a year ago, as credit card issuers have been favoring deposits to fund accounts, and total ABS issuance is down 22% year-over-year, at $145.8 billion for the period.

Collateral fundamentals have largely been within or better than the market’s initial expectations, supporting the ongoing spread rally in the RMBS and ABS markets. As illustrated by the chart below, the housing market has produced a V-shaped recovery by several measures due to strong demand for homes across the U.S. Additionally, the home price outlook continues to be favorable into the foreseeable future. To that end, home prices rose 4.8% in July, up from 3.2% a year ago, according to the latest report from Case-Shiller CoreLogic. Mortgage payment forbearance levels have been steadily declining, posting their largest weekly drop at the start of October, and mortgage current to delinquent roll rates are quickly approaching pre-COVID-19 levels. Consumer data also shows improving forbearance levels, though some forbearance resolutions are expected to lead to rising early delinquency rates. However, credit card data have significantly outperformed expectations, with low delinquency and robust payment rates. This performance has been attributed to stimulus from the CARES Act, but ongoing delays in additional stimulus pose risks to the sector’s positive performance.

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Strong demand in the housing market has outweighed other challenges and uncertainty, leading to the V-shaped recovery we see today.

Historically low 30-year mortgage rates have provided support to the housing market.

The median sale price for U.S. homes reached $320,000 at the end of the quarter, over 14% higher than year-ago levels.

Strong new issuance activity seen in June continued in the third quarter, especially in ABS.

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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