1、North America Securitized Products Research26 November 20192020 RMBS Credit OutlookStick to the topSecuritized Products Research Kaustub S. Samant ACNote: This piece is part of the US Fixed Income Markets 2020 Outlook, featuring our strategists views on the year ahead across asset classes.Table of C

2、ontents | PDF(1-212) 834-5444 HYPERLINK mailto:kaustub.s.samant kaustub.s.samantAni Gelashvili(1-212) 834-2605 HYPERLINK mailto:ani.gelashvili ani.gelashviliJ.P. Morgan Securities LLCSee page 24 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with compan

3、ies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. HYPERLINK / 2020 RMBS Credit

4、Outlook: Stick to the topOur model projected pace of HPA (2.5% in 2020) is enough to sustain the benign credit environment in RMBS creditMacroeconomic growth is the main risk, but it wont affect spreads next yearSlower rolldown should push CRT M2s 20bp higher from current levels by 1H2020AAA RMBS cr

5、edit is cheap and there is room for AAA RPL and non-QM spreads to tighten2.0 PTs will likely widen to 0-16 ticks back of CK, which at current levels is 1-16 ticks back of UMBS 3.5Investor pools, seasoning and shelf tiering are ways to pick up additional spread in 2.02020 returns should be lower than

6、 2019 returns as higher rates and wider spreads eat into CRT and 2.0 PT carryThe QM patch is set to expire in Jan 2021; changes to the patch will determine the future size and scope of non-QM, QM and GSE originationsWe project $150bn of gross issuance in the main RMBS credit sectors with increases i

7、n 2.0 and non-QM supplyThe RMBS credit curve started the year flat and then got even flatter (Exhibit 1). In fact, when you consider that rates rallied and on-the-run CRT shortened up, one could argue that the credit curve inverted this year (Exhibit 2). The flattening of the credit curve is not jus

8、t a RMBS credit story. Across unsecured and secured credit aside from the odd blip, since the crisis, spreads have rallied and credit curves have flattened. The big question is whether this can continue through 2020. As it relates to RMBS credit, we think the answer is no.Exhibit 1: CRT curve starte

9、d the year flat and then got even flatterDM on on-the-run CRT indices600Exhibit 2: On a DM/WAL basis, the CRT credit curve is invertedDM / WAL on on-the-run CRT indices120500400100DM / WAL80 Feb 17Feb 18Feb 19DM300200 Feb 17Feb 18Feb 1960 Nov 1940100 Nov 19200Source: J.P. MorganM1M2B10Source: J.P. M

10、organM1M2B1Macroeconomic growth is the main concern, but wont affect spreads next year. We are in late cycle territory but as per our economists, a recession is not imminent. A recession is not a 2020 event, but the outlook for global growth past 2020 is not great. It is unusual for expansions to la

11、st for more than a few years once the economy reaches a state like the one it is in today.The slowdown in housing is also unlikely to materially impact RMBS. Our model projected pace of HPA (2.5% in 2020) is enough to sustain the benign credit environment. The market segment most at risk high-end ho

12、using along the coasts tends to be in deals that are underwritten using the most stringent standards. Smaller homes that are found in CRT deals with less enhancement and thinner tranches are still seeing positive HPA.Credit performance wont drive spreads wider either. Current-to-30 roll rates in non

13、- QM and RMBS 2.0 have been better than expected and the quality of the collateral being delivered into both these sectors is high. The GSEs have taken proactive steps to reduce their high DTI concentrations and next years CRT deals will be cleaner than this years. Therefore, there is little from a

14、credit standpoint that should concern investors.Despite these sector positives, credit spreads are tight and there is not much room for them to come in. The CRT credit curve is flat and arguably, inverted. Furthermore, several factors will negatively affect new issue CRT spreads. First, WACs are set

15、 to drift lower and as per our rates forecast, the long end of the curve is set to move modestly higher. Taken together this will slow down the rolldown of 2020 vintage deals. The carry profile will also worsen as the J.P. Morgan forecast calls for LIBOR to further decrease. Given this backdrop, we

16、look for on-the-run CRT M2s to end 1H 2020 20bp higher at 1ML+225bp DM. This forecast is also in line with the modest tightening forecasted by our HY strategists (more on this in the CRT section).Judging by investor survey responses, the market seemed to agree with this view (Exhibit 3).Exhibit 3: I

17、nvestor survey: Where do you think CRT M2s will trade at the end of 2020?35%30% Responses25%20%15%10%5%0%180185200210215220225 225Spread to 1m LIBOR (bp)Source: J.P. MorganWith credit spreads expected to widen and risks to global growth building, we prefer sticking to AAA RMBS credit where we see ro

18、om for AAA RPL and non-QM spreads to tighten. AAA RMBS credit offers a 30-40bp spread pickup to AAA ABS and CMBS (Exhibit 4). Specifically, AAA RPL is our top pick within RMBS credit assets. The RPL s-curve has been flat this year, and speeds have not moved higher in the rate rally. Unlike non-QM, t

19、he structure also offers price upside potential if rates and/or spreads rally.Exhibit 4: AAA RMBS credit offers a 30-40bp spread pickup to AAA ABS and CMBSDM / bp vs WALJumbo 2.0 FCF Non-QMJumbo 2.0 PT FNCKRPL PTSubprime Auto2012 CMBS Conduit A4CMBS Conduit A1 2012 Freddie KPrime Auto2014 Freddie K1

20、40120DM / bp100806040201.01.52.02.53.03.54.04.55.0WALSource: J.P. MorganAAA non-QM is also a good alternative for investors looking for stable carry and yield profiles. Par price at issuance means that investors dont have to be as concerned about speed variability. However, the 2 year call in the st

21、ructures limits any price appreciation as bonds dont trade too much above par in secondary. Like most investors, we expect non-QM collateral quality to deteriorate in 2020, but not enough to impact spreads (Exhibit 5).Exhibit 5: Investor survey: What are your expectations for non-QM credit performan

22、ce trends?60%50% Responses40%30%20%10%0%Significant deteriorationSource: J.P. MorganModerate deteriorationRelatively unchangedModerate improvementSignificant improvementBoth AAA RPL and AAA non-QM are off their all-time tights of around N+60bp. Given our outlook for higher rates and tighter IG sprea

23、ds, there is certainly some room for spreads to come in in both sectors. However, the supply dynamics in both sectors are different: our RPL supply forecast is unchanged from this year, while we expect non-QM supply to almost double. This should dampen the spread tightening in non-QM relative to RPL

24、.RMBS 2.0 AAA PT is rich when compared to agency jumbo spec pools. The 2.0 PT is trading right on top of CK, and certain deals have traded through CK. We look for the 2.0 PT to trade at 0-16 ticks above CK by end of first half of 2020. This is the average spread difference between CK and 2.0 PT over

25、 the past three years, and reflects the better liquidity, stronger credit risk and bank capital benefits of owning CK. At current levels, this would put 3.5 AAA PT at 1-16 bk of TBA.Of course, this doesnt mean that there is no relative value to be had in 2.0. Investor deals, when they are brought to

26、 the PLS market, often trade on top of on-the-run 2.0 PT. The PLS market assigns no payup for the smaller loan size and investor profile of the loans. These deals are therefore cheap on a nominal and OAS basis.Structure, seasoning and shelf tiering are other ways to pick up additional spread in 2.0.

27、If our spreads forecast is realized, 2020 returns will be lower than 2019 returns (Exhibit 6). Price returns were positive in 2019 as CRT spreads came in after the late 2018 selloff and the rate rally helped RMBS 2.0 PTs. However, next year we expect higher rates and wider spreads to eat into carry

28、returns in both sectors.Exhibit 6: If our spreads forecast is realized, 2020 returns will be lower than FY 2019 returnsMonthly and total (year-to-date, unannualized) returns, %OctReturn2019 YTD ReturnTotalPriceFactor Principal CouponPrime Fixed0.4%6.8%-0.1% -27.7%29.3%5.2%Prime Hybrid0.5%6.1%0.6%-22

29、.4%23.9%3.9%Alt-A Fixed-0.1%6.1%-1.2%-6.0%7.4%5.9%Alt-A Hybrid0.2%7.6%2.9%-11.7%12.4%3.9%Alt-A Floater0.2%6.1%2.4%-11.6%12.9%2.4%Option ARM0.3%6.6%3.4%-12.1%12.9%2.5%Subprime LCF1.2%13.5%10.1%-2.4%2.7%3.1%Prime.10120.1%6.4%4.1%-19.0%19.1%2.2%Prime.13H10.5%6.1%3.7%-10.6%10.5%2.4%Prime.140.2%4.1%2.4%-

30、15.2%14.1%2.8%Prime.150.3%5.2%3.2%-13.3%12.5%2.7%Prime.160.0%3.8%3.3%-12.6%10.6%2.4%Prime.170.4%6.2%3.5%-12.4%12.1%2.9%Prime.180.2%4.6%2.2%-30.9%30.3%3.0%CRT.18.BBB-/BBB+0.2%2.5%0.2%-45.2%45.2%2.3%CRT.18.BBB-/BBB+.HLTV0.2%2.3%0.2%-59.3%59.3%2.1%CRT.18.B/B+0.1%7.3%3.4%0.0%0.0%3.9%CRT.18.B/B+.HLTV0.0%

31、7.2%3.2%0.0%0.0%4.0%CRT.18.NR/B-0.1%15.6%10.2%0.0%0.0%5.4%CRT.18.NR/B-.HLTV0.1%16.8%11.1%0.0%0.0%5.7%SFR.18.AAA0.2%3.5%0.7%-6.1%6.1%2.8%SFR.18.AA/AA+0.4%2.9%0.0%0.0%0.0%2.9%SFR.18.A/A+0.2%3.1%0.0%0.0%0.0%3.1%SFR.18.BBB+0.3%3.7%0.4%0.0%0.0%3.3%SFR.18.NR0.3%4.2%0.5%0.0%0.0%3.7%Source: J.P. MorganHousi

32、ng Outlook: Fixer upperThe housing market continued to slow in 2019. Despite low rates, HPA slowed across all housing indices. Case-Shiller YoY HPA slowed to 3.17% as of August from 5.68% a year ago. Similarly, CoreLogic YoY HPA dropped to 3.68% from 5.67% in a similar period. Our home price model n

33、ow calls for 2.5% HPA in 2020, a slowdown from the 5% to 6% HPA seen in prior years.Lack of housing affordability remains the main challenge to home price growth. We measure housing affordability at the national level using monthly housing cost to monthly income ratio. Currently, the ratio stands at

34、 25% which is higher than the 21% achieved in 2011, but within the pre-crisis range (Exhibit 7).Exhibit 7: Lack of housing affordability remains the main challenge to the home price growthRatio of monthly mortgage housing costs to monthly median income (%)40%35%30%25%20%19901994199820022006201020142

35、018Note: Assumes that a 30-year fixed-rate mortgage is the only option Source: J.P. Morgan, CoreLogic, BloombergLower rates have not helped eliminate some of the affordability constraints because income growth has not kept up with HPA. At the national level, normalized HPA is 7% higher than normaliz

36、ed income (Exhibit 8).Exhibit 8: At the national level, normalized HPA is 7% higher than the normalized incomeHPI and income indexed to 100 in January 2000 CoreLogic HPIPer Capital Disposable Personal Income225200175150125100752000200320062009201220152018Source: J.P. Morgan, CoreLogic, U.S. CensusOf

37、 course, not all parts of the country are experiencing this dislocation between income and home prices. In Exhibit 9, we map out a ratio of HPI over income by MSA. The map shows that parts of California, Florida, and the Northeast have all seen home prices grow disproportionally faster than income.

38、On the other hand, the Midwest, parts of the south, and the interior west have had income grow in line with HPA.Exhibit 9: Parts of California, Florida, and the Northeast have all seen home prices grow disproportionally faster than incomeRatio of indexed HPI to indexed income as of December 2017Sour

39、ce: J.P. Morgan, CoreLogic, Bureau of Economic AnalysisFor mortgage credit investors, structural protection in RMBS deals is well aligned with the risks associated with the housing market. Higher-end housing along the coasts is slowing, but gets securitized in RMBS 2.0, which has high credit support

40、, high FICOs and low LTVs. On the other hand, CRT deals that have thin credit enhancement levels are backed by lower-priced homes that are still seeing positive HPA growth. Please see our 2020 Housing Outlook for more detailed views HYPERLINK l _bookmark0 1.CRT: Cleaner collateral but slower rolldow

41、nCRT deals in the first half of next year will have cleaner collateral, but slower rolldown. Average WACs on GSE delivered collateral peaked at 5% in January 2019, and this collateral is still finding its way into recently issued CRT deals (Exhibit 10). The rate rally in 2019 will push 2020 CRT WACs

42、 below 4% or more than 100bp lower than CRT deals issued in 2019.Exhibit 10: WACs on 2020 vintage CRT will be lower than 2019 vintage CRTWAC by loan origination date2019 vintage CRT 2020 vintage CRT5.55.0WAC4.54.03.53.0Jan 16Jun 16Nov 16Apr 17Sep 17Feb 18Jul 18Dec 18May 19Oct 19 Origination DateSour

43、ce: J.P. Morgan, eMBS1 HYPERLINK /research/content/GPS-3186462-0 /research/content/GPS-3186462 HYPERLINK /research/content/GPS-3186462-0 -0All else equal, this will result in a much slower pace of deleveraging than 2019 vintage deals. A 5% WAC pool has a model projected life CPR of 25CPR versus 10CP

44、R for a 4% WAC pool. In todays rate environment, at 12 month deal age, credit support for a 4% WAC M2 would be projected to increase by 14bp versus 45bp for a 5% WAC M2 (Exhibit 11). Slower deleveraging will likely mean a slower upgrade cycle for 2020 vintage deals.Exhibit 11: At 12 month deal age,

45、credit support for a 4% WAC M2 would have increased by 14bp versus 45bp for a 5% WAC M2Change in credit support by deal age for 4% WAC vs 5% WAC M2s 5% WAC M24% WAC M21.701.601.501.401.301.201.101.00123456789101112Deal AgeSource: J.P. MorganUpgrades should also be slower despite 2020 CRT collateral

46、being cleaner than this years deals. The proportion of high DTI collateral being delivered to the GSEs has decreased since the start of the year. Around 24% of Fannie collateral was 43DTI last month versus 35% at the start of the year. Freddies 43DTI collateral has also dropped by around 8% in the s

47、ame period and is right on top of pre-2018 levels (Exhibit 12). Furthermore, risk layering in high DTI collateral has also improved. Average FICOs for 43DTI collateral are 10 points higher than last year. LTVs have also dropped by 3 points (Exhibit 13).Exhibit 12: The proportion of high DTI collater

48、al being delivered to the GSEs has decreased since the start of the year% 43 DTI collateralExhibit 13: Risk layering in high DTI collateral has also improvedWeighted-average FICO and LTV for 43 DTI collateralFreddieFannie40%35% 43 DTI30%25%20%15%Jan 17Jul 17Jan 18Jul 18Jan 19Jul 19Source: J.P. Morga

49、n, eMBS74685 FICO (Left)Orig LTV (Right)74484742FICOLTV74083738827368173473280Jan 17Jul 17Jan 18Jul 18Jan 19Jul 19Source: J.P. Morgan, eMBSThis all bodes well for CRT investors, but is unlikely to mean much for spreads. Spreads didnt widen when more high DTI was going into CRT and they are unlikely

50、to come in on the back of this collateral improvement. Instead spreads will likely be driven by broader credit assets and the changing roll down profile.Due to lower pool WACs, new issue 2020 CRT M2s will have a materially longer WAL than current deals. Assuming no change in rates or structure, a CR

51、T M2 issued from 4% WAC collateral will be 4.55yr WAL vs. 1.5-2yr WAL for a M2 from 5% WAC collateral. We expect the market to start pricing in this slower rolldown and look for new issue 2020 CRT M2s to trade 20bp wider than current levels by 1H2020 putting CRT M2s at 1ML + 225bp.Furthermore, the r

52、elationship between HY and CRT M2 dislocated in mid-2019. The two spreads that typically track each other moved in different directions as HY widened out on the back of deteriorating credit quality. Our HY strategists are calling for a tightening of 40bp, which when combined with our CRT M2 spread t

53、arget would bring that relationship back in line (Exhibit 14).Exhibit 14: The HY spread target of 440bp is consistent with our spread forecast of 1ML+225bp for OTR M2s(bp)350300250200CRT M2 (left)High Yield (right)700HY Target = 440bp600500400150Jan-18Jun-18Nov-18Apr-19Sep-19Feb-20Source: J.P. Morga

54、n300In new issue CRT, we recommend moving into M1s. Given the structure, bond extension here should be limited, and spreads could move tighter in line with IG corporates and other high quality structured assets. In CRT LCFs, we recommend seasoned 2016 vintage premium dollar price LCFs over new issue

55、. There is some bond selection required here, but even at model DMs, 2016 vintage LCFs can offer 20bp to 40bp spread pickup to on-the-run (Exhibit 15). The real upside scenario, however, is if our rates colleagues 2020 outlook is realized and the long end of the curve sells off. In that scenario, th

56、e embedded IO in seasoned CRT can generate decent alpha over new issue par priced CRT.Exhibit 15: At model DMs, 2016 vintage LCFs can offer 20bp to 40bp spread pickup to on-the-run LCFsModel DM and WAL by deal vintage260Model DM2302002016201720182019on-the- run M2 = 205bp17014011.522.533.544.55WALSo

57、urce: J.P. MorganRMBS 2.0: PT CK spread to widen. Investor pools, seasoning and shelf tiering offers opportunitiesThe 2.0 market had a slower than expected 2019. For most of the year, monthly issuance struggled to go past $1bn. FY 2019 supply of $15bn will be far lower than our original projection o

58、f $40bn. Two factors drove this lower than expected supply: strong bank portfolio demand for non-conforming loans and aggressive GSE pricing for jumbo conforming. Competition with the GSEs resulted in less high bal conforming collateral being delivered into PLS in 2019 (Exhibit 16).Exhibit 16: In 20

59、19, less conforming jumbo was delivered into PLS than in 2018% conforming jumbo loans in 2.0 deals by deal close date70% Conforming Jumbo60%50%40%30%20%10%0%Jan 16Aug 16Mar 17Oct 17May 18Jan 19Aug 19 Deal Close DateSource: J.P. Morgan, CoreLogicWe expect 2020 RMBS 2.0 supply to hit $30bn. Bank portf

60、olio demand has eased up and conduit pricing is more competitive with the GSEs. Competition with the GSEs could also be less of an issue given Calabrias push to reduce the GSE footprint and the overall philosophy behind housing reform.The market has already proven that high bal conforming gets bette