MARKET MOVER - BNP PARIBAS - Investment Services India

MBS: Remain Underweight, GNM CBRs Up
• Given our macro view of lower rates, we
remain underweight mortgages as they are
trading with shorter durations and are likely to
underperform in a rally.
• The August GNMA Delinquency Report
showed that 30- and 60-day delinquencies were
up, and CBRs increased dramatically for pools
issued by BofA, Citi and GMAC.
The direction of mortgage spreads continues to hinge
on the rates market. Dollar price compression due to
prepayment concerns keeps performance in check in
a rally while a lack of substantial rate lock associated
origination keeps prices from falling too much in a
selloff. Given the statement from the Fed on
Tuesday, which laid the groundwork for further
liquidity easing, we remain bullish on the rates
market. With that view, we also remain negative on
mortgages.
GNMA Delinquency Report
The GNMA Delinquency report for August showed an
increase in 60-day delinquencies for GNMAs across
all products from 1.49 to 1.58; by issuer, we saw
similar results. For instance, BofA 60 day
delinquencies increased from 1.53% to 1.7%, Chase
increased from 1.6% to 1.69%, Citi increased from
1.66% to 1.74%, Wells increased from 1.1% to
1.16%, GMAC increased from 2.22% to 2.34% and
TBW increased from 5.03% to 5.24%. We also saw
increases in 30-day delinquencies from 3.94% to
4.11% across all products. The increases in 30- and
60-day delinquencies are in line with our view that
seasonals and home tax credit were behind the
improved delinquencies earlier in the year; with the
end of these effects, delinquencies have risen.
Overall, 90+ day delinquencies declined from 1.27%
to 1.18%, while CBRs increased from 4.02% to
6.84%. The decline in 90+ day delinquencies and
increase in CBRs was led by BofA, Citi and GMAC.
BofA 90+ delinquencies declined from 1.09% to
0.630% and CBRs increased from 0.06% to 10.52%,
and that was one of the reasons why CPRs on BofA
loans increased substantially in August in addition to
borrowers responding to lower rates. We had
mentioned in our most recent prepayment
commentary that BofA CBRs had declined sharply in
July and the significant increase in CPRs in August
might be due to them catching up after taking a
month off from buying out delinquent loans, and the
delinquency report confirmed this assumption. Citi
Chart 1: Empirical vs Trader Hedge Ratios to
10y Swaps
70%
60%
50%
40%
30%
20%
10%
0%
4.0s Empr 4.0s Trader 4.5s Empr 4.5s Trader
5.0s Empr 5.0s Trader 5.5s Empr 5.5s Trader
14-Jun-10 5-Jul-10 26-Jul-10 16-Aug-10 6-Sep-10
Source: BNP Paribas
Chart 2: 30,60 and 90+ Day Delinquencies by
Issuer
BOA CHASE CITI GMAC
Wells
30 60 90+ 30 60 90+ 30 60 90+ 30 60 90+ 30 60 90+
Aug-10 4.28 1.70 0.63 4.89 1.69 0.77 4.60 1.74 0.86 4.66 2.34 5.46 3.22 1.16 0.16
Jul-10 4.04 1.53 1.09 4.67 1.60 0.74 4.34 1.66 1.27 4.60 2.22 5.32 2.96 1.10 0.17
Jun-10 4.24 1.52 0.59 4.78 1.54 0.79 4.36 1.62 1.23 4.72 2.15 5.28 3.10 1.13 0.19
May-10 4.10 1.42 0.57 4.60 1.56 0.77 4.18 1.58 1.15 4.50 2.18 5.21 2.98 1.06 0.19
Apr-10 3.59 1.34 0.56 3.83 1.44 2.20 3.68 1.43 1.12 4.01 1.89 5.14 2.55 0.96 0.19
Mar-10 3.77 1.47 0.56 3.89 1.50 2.27 3.80 1.50 1.13 4.05 1.99 5.00 2.64 1.12 0.23
Feb-10 4.13 1.64 1.12 4.46 1.66 2.53 4.61 1.76 1.25 4.33 2.06 4.93 3.08 1.28 0.27
Jan-10 4.33 1.95 2.22 5.14 2.14 2.56 5.06 2.07 1.27 4.71 2.28 4.71 3.54 1.49 0.38
Dec-09 4.36 1.96 1.72 5.00 2.16 2.40 4.67 2.00 1.32 4.55 2.21 4.40 3.41 1.54 0.64
Nov-09 4.45 1.94 5.32 5.22 2.14 2.36 4.72 2.09 1.31 4.61 2.16 4.28 3.65 1.52 0.96
Oct-09 3.91 1.83 4.87 5.01 2.17 2.16 4.33 2.14 5.71 4.23 2.08 3.87 3.42 1.51 1.27
Sep-09 4.19 1.91 4.54 5.33 2.22 2.30 4.58 2.17 5.50 4.29 2.07 3.70 3.81 1.61 1.43
Aug-09 4.15 1.81 4.61 5.66 2.16 2.16 4.50 2.09 5.29 4.47 1.98 3.30 3.76 1.53 1.86
Jul-09 3.79 1.70 4.47 5.27 2.08 3.33 4.19 1.95 5.07 4.22 1.73 3.05 3.27 1.47 1.71
Jun-09 4.08 1.74 4.45 6.11 1.99 2.75 4.44 1.98 4.84 4.26 1.74 2.86 3.64 1.42 1.59
May-09 3.86 1.68 4.37 5.27 1.75 2.03 4.57 1.99 4.71 3.95 1.70 2.68 3.48 1.32 2.06
Apr-09 3.67 1.64 4.21 4.89 1.61 1.35 4.24 1.92 4.49 3.61 1.59 2.53 3.15 1.27 2.57
Mar-09 3.76 1.69 4.21 4.87 1.55 0.79 4.20 1.78 4.25 3.91 1.63 2.66 3.12 1.26 2.84
Feb-09 4.25 1.83 4.34 5.37 1.70 0.90 4.59 2.07 4.33 4.06 1.77 2.70 3.42 1.46 3.11
Jan-09 4.93 2.22 4.48 6.20 2.08 0.98 5.19 2.32 4.37 4.60 1.96 2.59 3.95 1.71 3.19
Source: BNP Paribas
1 Month CBRs
-
50
45
40
35
30
25
20
15
10
5
Chart 3: CBRs by Issuer
Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10
Source: BNP Paribas
BOA
CHASE
CITI
GMAC
Wells
90+ delinquencies declined from 1.27% to 0.86%,
while CBRs increased from 6.6% to 12.25%. GMAC
CBRs also saw a substantial increase from 3.97% to
6.1%; however, their 90+ delinquencies remains
above 5%, actually increasing from 5.32% to 5.46%.
Olurotimi Ajibola / Anish Lohokare 23 September 2010
Market Mover, Non-Objective Research Section
23
www.GlobalMarkets.bnpparibas.com