507068
507068
507068
Ohmsatya Ravi
+1 212 667 2338 ohmsatya.ravi@nomura.com
Gaetan Ciampini
+1 212 667 2408 gaetan.ciampini@nomura.com
Dhivya Krishna
+1 212 667 2183 dhivya.krishna@nomura.com
Arun Manohar
+1 212 667 9360 arun.manohar@nomura.com
Ankur Mehta
+1 212 667 2330 ankur.mehta@nomura.com
Mortgage Credit: Home Price Outlook and Analysis of Current Pay Bonds
In the non-agency market, flows were relatively light this week and prices remained firm despite increased macro volatility. We discuss our latest home price outlook and expectations for shadow inventory liquidations and investor demand. We continue to expect nationwide home prices to fall by 3% through 1Q2013 in our base case scenario. Separately, we analyze historical returns and various metrics for calculating carry on current-pay bonds.
Paul Nikodem
+1 212 667 2130 paul.nikodem@nomura.com
Lea Overby
+1 212 667 9479 lea.overby@nomura.com
Steven Romasko
+1 212 298 4854 steven.romasko@nomura.com
Consumer ABS
Despite the shorter week and broader market volatility, the consumer ABS market held firm with generic spreads remaining flat. There were three new issue deals that were upsized due to investor demand remaining firm in the sector. FFELP released its updated rating criteria for FFELP loans and has put $7.5bn worth FFELP bonds on downgrade watch.
Kunal Singal
+1 212 667 1814 kunal.singal@nomura.com
Table of Contents
Agency MBS: Overview Agency MBS: Prepays Mortgage Credit Consumer ABS CMBS Market
Page
2 7 11 23 26
See Disclosure Appendix A1 for the Analyst Certification and Other Important Disclosures
06 April 2012
Arun Manohar
+1 212 667 9360 arun.manohar@nomura.com
March TTB Report 1-mo CPR 3-mo CPR 44.0 39.0 33.0 31.0 46.0 40.0 47.0 37.0
Source: Nomura Securities International. The data quoted under March TTB Report are our estimates based on numbers reports by a sample of dealers. We believe these numbers to be a reasonable representation of TBA deliverable speeds. The assumed funding rate is 20bp.
While we have been arguing for a few months that long-term supply/demand technicals are strongly We YieldBook, the agency MBS market even without QE 3 involving agency MBS, we are mindful of the positive for Ginnie Mae, Nomura Securities International short-term impact of the changing expectations for QE 3 involving agency MBS on agency MBS spreads. On Tuesday, the Fed released minutes of the March FOMC meeting which led to a sharp selloff in the rates market and MBS spread widening. Specifically, our rates strategists highlight the following change in the language of the FOMC statement from January to March. In the January minutes, there was a statement "A few members observed that, in their judgment, current and prospective economic conditionsincluding elevated unemployment and inflation at or below the Committees objective could warrant the initiation of additional securities purchases before long".
06 April 2012
That changed in March to saying "A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate consistent rate of 2 percent over the medium run". Thus, it appears that there is a clear shift in stance where in status-quo no longer requires easing. In addition, we thought that the this statement set up the market to sell-off further into NFP and beyond if the employment number came in above expectations. However, due to renewed concerns about the Euro-area growth and the weak March employment print, the 10-year treasury rallied by 22bp (close to 2.08%) and increased the probability of QE 3 again. In addition, the mortgage market moved comfortably away from the likely point of the onset of convexity related flows and it is hard to see agency MBS widening meaningfully at current rate levels. It is worth highlighting that agency MBS spreads versus Treasuries have been remarkably stable even as the 10-year Treasury had moved in a wide range over the past few weeks, which is probably an indication that there is very little conviction in the market on the direction of MBS spreads. We continue to suggest investors remain neutral and wait for a better entry point to overweight agency MBS.
Fig. 2: HARP and Streamline Refinance loan volume though Fannie and Freddie
70,000
60,000
50,000
# of Loans
40,000
30,000
20,000 10,000
1 A majority of this section is a reprint of the short notes published on April 4, 2012 2 Please see the short note titled Re-assessing the HARP 2.0 Prepay Risk published on March 1, 2012 for details. 3
06 April 2012
What surprised us the most about the sharp increase in HARP volume reported by FHFA is the fact that January prepayments did not really show a corresponding increase in speeds on high LTV loans. Figure 3 shows speeds on HARP eligible Fannie and Freddie MBS for pools with current LTV less than and greater than 80%. We also show the speeds on HARP eligible loans implied by the FHFA 3 report in Figure 4 . Prepayments on high LTV pools (current LTV greater than 80%) saw a 0-2%CPR month-over-month decline in January for both Fannie and Freddie MBS. At the same time, the prepayments implied by the FHFA report actually indicate a 4%-7%CPR jump in speeds on HARP eligible pools. Prepayments on pools with current LTV less than 80% were more consistent with the decline in streamline refinance applications shown in the FHFA report.
35%
30%
CPR (%)
25% 20%
15%
10% 5%
May-11
Source: Fannie Mae, Freddie Mac, FHFA, Nomura Securities International Estimates
We think that the factor that most convincingly explains this decoupling is related to the LLPA reduction that took place as part of HARP 2.0. Basically, the GSEs reduced the LLPA cap on HARP loans from 2% to 75bp starting January 1st, 2012. This reduction in LLPAs was based on when the loans were sold to the GSEs. It is possible that even though the rate of HARP loan closings was roughly the same in December and January (as reflected by the prepayments on pools with current LTV greater than 80% which stayed more or less unchanged in the two months), lenders held on to a large portion of these loans in December and sold them to the GSEs in January once the lower LLPAs became effective. In other words, the HARP loan closings remained unchanged between January and December but the volume of loans sold to the GSEs was artificially lower for the month of December and higher for the month of January. For example, any HARP borrower with an LTV>97% was being charged an LLPA of 1% or higher by Fannie and Freddie till January 1st, 2012. If the lender would have held on to this loan in their portfolio and sold it after January 1st, 2012, they would have had to pay the GSEs an LLPA of no more than 75bp. We estimate that 40-50% of HARP loans had an LTV greater than 97% towards the end of last year. Overall, we estimate that 50-60% of HARP loans were impacted by the reduction in LLPAs as part of HARP 2.0. This would explain the 35-37% drop in HARP volumes in December and the sharp reversal in January. The front-running of LLPAs explains both the trends seen in prepayments, and in the volume of HARP loans sold to the GSEs as reported by FHFA. To adjust for this whipsaw, we think it is more appropriate to compare the average HARP volume in December/January (~40k) to the volume in November (~36k) to see the impact of HARP. This suggests an increase of only 9% in HARP volumes.
These estimates use the FHFA HARP volume numbers for 80-125%LTV loans to arrive at HARP prepays 4
May-11
Sep-10
Mar-11
Sep-11
Mar-12
Jan-11
Nov-11
Nov-10
Jan-12
Jan-12
0%
Jul-10 Jul-11
CPR (%)
06 April 2012
The GN I 4.0s butterfly has spiked up from 1-03 to 1-20+ and the GN II 4.0s butterfly has spiked up from 0-28 to 1-21+ since the beginning of the year and, at their current price levels, both GN I and GN II 4.0s butterflies are looking quite rich to our models (Figure 5). We now recommend an underweight on GN 4.0s versus GN 3.5s and GN 4.5s across the GNMA coupon stack for real money investors and will track the performance of GN II 4.0s fly starting with its current level of 1-19+ for May settlement for this trade (the GN I and GN II 4.0s flies have positive carry of 2.0 ticks per month at the moment). Although a portion of the recent richening of GN 4.0s butterflies could be attributed to markets nervousness about the possibility of changes to MIP on streamline refinancing of pre-May 2009 originated FHA collateral adversely impacting GN 4.5s valuations, this is true only for GN I 4.5s. The outstanding true float of pre-May 2009 GN II 4.5s is very limited and GN II 4.5s TBA is unlikely to be impacted by any changes in MIP structure for streamlined refis of pre-May 2009 collateral. Consequently, we are choosing to put this trade in GN II 4.0s fly instead of in GN I 4.0s fly. The primary risk to this trade is that GN 4.0s flies could spike another 3-5 ticks higher if buying of GNMAs by overseas investors turns out be stronger than anticipated in April (Japan's new year). Note that shorting the GN II 4.0s fly is exactly the same trade we initiated on March 2 and recommended taking the 7.5 ticks profit on March 21. As GN 4.0s butterflies have spiked higher again since then, we are reinitiating the short GN II 4.0s butterfly trade.
70.0
60.0
Price (ticks)
50.0
40.0
30.0
20.0
10.0
0.0
GN I 4.0s Butterfly
Source: YieldBook, Nomura Securities International
GN II 4.0s Butterfly
This trade was initiated in a short report published on April 3 when the GN II 4.0s fly was bid at 1-21+. As of now, the GN II 4.0s fly seems to be trading at around 1-23/1-24. 5
06 April 2012
Figures 6 and 7 show valuations of the 30-year and 15-year coupon stacks on our models as of yesterdays close (the results from YieldBook models adjusted to reflect our expectations for prepayment speeds). Across both the 15-year and 30-year coupon stacks, lower coupon passthroughs are looking slightly cheaper than higher coupon passthroughs but we view down-incoupon trades as only marginally attractive at this point. The main relative value opportunity within the passthrough market we like is to be short 15-year/30-year coupon swaps. Although 15-year MBS have lagged 30-year MBS by 2-3 ticks since we first recommended shorting 15-year/30-year swaps on March 21, we believe that the 15-year MBS sector still quite rich and the continue to recommend shorting DW 3.5s and DW 4.0s versus FN 4.0s-5.0s. The current rates environment (the 10-year Treasury is back at 2.08% which is good for carry trades) and the possibility of QE 3 expectations increasing following the weaker than expected employment print released this morning are additional positives for shorting 15-year/30-year coupon swaps. Our strategy team recommended buying the GD/FN 3.5s swap on February 2 when this swap was offered at -8.25 ticks for March settlement. The same swap is being bid at -7 ticks at the moment and also offered a positive carry of 0.5-0.75 ticks from March/April dollar rolls. We now recommend taking profits on this trade (1.75-2.0 ticks including carry) as the upside to this trade is very limited and GD/FN swaps typically take a long-time to realign close to their fair value. However, real money investors looking for adding lower coupon MBS should still buy Golds instead of FNMA MBS.
85 100 95 89 63 67
20 20 17 17 10 30
11 7 1 0 -12 8
43 55 62 64 65
16 13 13 16 29
06 April 2012
Arun Manohar
+1 212 667 9360 arun.manohar@nomura.com
A majority of this section is a reprint of the short note published earlier today.
7
06 April 2012
Is the MBA Index Artificially Higher? Both the MBA and originators have been highlighting the sharp increase in HARP applications since the HARP 2.0 program was rolled out late last year. Note that a surge in HARP applications has a more profound impact on the MBA refinancing index as the survey only includes retail applications and HARP loans typically tend to be processed through this channel. Another factor that could be potentially causing the MBA index to overstate refinancing activity recently is a decline in TPO volume. To highlight the impact of TPO %, let us focus on Figure 1 where we consider two hypothetical indices the Total Refi Index which reflects overall refi activity (TPO and retail) and the Retail Refi Index, which, similar to the MBA index, only captures retail activity. Let us assume that the total refi volume remains unchanged from month 1 to month 2 as reflected by the 8000 points on the survey but the TPO% declines from 50% to 40%. In this scenario, even though overall activity has remained unchanged, the Retail Refi Index shows a 20% increase showing how a change in the TPO percentage can artificially distort the index. Figure 1 shows the percentage of loans that have been originated through the TPO channel by origination month. This ratio has declined from a high of around 48% to 39% recently. Although the decline has not been a one month phenomena, it does show that TPO percentage has been declining, which could have inflated the MBA index readings for certain weeks.
Month 1 Month 2
Retail Refi Index Change in Retail Refi Index 4000 4800 20%
Fig. 2: TPO Percentage for Fannie and Freddie MBS by Origination Month
50%
48%
46% 44%
TPO (%)
42%
40%
38%
36% 34%
32%
30%
Decline in Pull-through Rates The pull through rate indicates what percentage of mortgage applications eventually close. The average pull through rate has recently been between 60-70%. Presumably, this pull through rate is different for loans with good credit quality and low LTV, versus HARP loans which typically tend to be of higher risk. Anecdotally, we have heard that HARP 2.0 applications are being declined for reasons ranging from high LTV ratios to high debt ratios of the borrower. At the same time, MBA and lenders have been reporting that they have seen a surge in HARP applications over the past couple of months since HARP 2.0 was announced. This could have not only led to the artificial increase in the refinancing index (as highlighted before), but could have also resulted in lower overall pull through rates which slowed down prepayments. Although this may explain the more muted increase in speeds for the HARP eligible collateral, it does not convincingly explain the lower than expected increase on lower coupon speeds (non-HARP collateral).
06 April 2012
Capacity and Loan Size Two other factors that could have caused speeds to be slower than expected are: 1) capacity constraints and 2) reduction in average loan size. However, even if we assume that originators were at capacity last month (February), speeds should still have increased by at least 10% as indicated by day count. Further, the larger portion of HARP loans that closed in March should have led to more capacity as these loans are easier to underwrite. A quick look at the average loan size of paid off loans shows no significant difference from the prior month indicating that the slower than expected speeds cannot be explained by loan size variation either.
Freddie
Coupon 4 4.5 Vintage 2010 2009 2010 2009 2005 5 2010 2009 2008 2007 2005 5.5 2009 2008 2007 2006 2005 6 2008 2007 2006 2005 6.5 2008 2007 2006 Apr-12 21.3 35.5 26.8 36.0 35.4 18.9 28.3 39.2 30.2 31.9 19.7 32.1 29.9 31.2 28.9 28.0 24.8 28.8 22.4 20.0 19.8 24.3 Mar-12 21.0 32.9 26.6 33.9 34.7 17.9 25.8 36.9 27.0 29.0 20.3 30.4 24.9 25.5 24.9 23.9 21.0 22.5 17.8 18.5 15.6 18.0 Change 1% 8% 1% 6% 2% 6% 10% 6% 12% 10% -3% 6% 20% 22% 16% 17% 18% 28% 26% 8% 27% 35% Apr-12 22.7 33.6 25.2 35.3 33.5 17.7 25.5 36.3 32.1 28.8 19.0 30.8 29.6 28.1 22.3 25.1 22.1 23.2 14.5 18.7 15.8 17.4
Fannie
Mar-12 21.5 29.7 24.3 33.1 31.2 16.3 24.1 36.2 28.1 26.2 16.2 28.7 26.1 25.4 19.8 21.7 18.8 19.8 12.0 15.2 12.9 13.1
Change
5% 13% 4% 7% 7% 9% 6% 0% 14% 10% 18% 8% 13% 11% 13% 16% 18% 17% 20% 23% 23% 33%
06 April 2012
50
40
CPR (%)
30
20 10
Bank of America
Chase
Citi
Wells Fargo
CPR (%)
4.0 4.5 5.0 5.5 6.0 6.5 4.0 4.5 5.0 5.5 6.0 6.5 4.0 4.5 5.0 5.5 6.0 6.5
BofA Mar-12
Source: Ginnie Mae, Nomura Securities International
Chase Apr-12
Wells
06 April 2012
Mortgage Credit
Market Overview
In subprime, there was a pick-up in volumes mid-week and prices remained firm despite increased volatility in broader markets. Flows were concentrated in levered seasoned mezzanine bonds that traded at strong levels on the back of strong retail demand. There was also meaningful activity in the Option ARM market despite the shorter week and broader market weakness. Total BWIC volumes were approximately $1.2bn in subprime and $500mn in Option ARM. In prime and Alt-A, flows were relatively muted throughout the week, although prices remained firm despite the increased macro volatility and the sell-off in index products. There were notable flows in seasoned hybrids and dented floaters. Total BWIC volumes were approximately $220mn in prime and $500mn in Alt-A. A summary of trading volumes from TRACE is provided later in this section.
Paul Nikodem
Arun Manohar
News Overview
Home Prices (CoreLogic, Trulia): The CoreLogic Home Price Index (excluding distressed sales) was up 0.7% in February over the previous month, but was 0.8% down year-on-year. Including distressed sales, the index declined approximately 2% on the year and 1% relative to the previous month. According to Trulias recently launched Price Monitor, the seasonally-adjusted asking price on forsale homes increased 1.4% in 1Q2012. Month-over-month, the asking price increased by nearly 1% in March. According to the metric, Miami, Phoenix and Pittsburgh rank amongst the top 5 MSAs with highest year-over-year increases while Seattle, Sacramento and Las Vegas rank in the bottom 5. Rent Prices (Trulia): Nationally, asking rents were 5% higher over the previous year. Amongst the largest MSAs, the most aggressive rent growth was experienced in Miami (+12%), San Francisco (+11%), Denver (+10%), Seattle (+10%), San Jose (+9%) and Boston (+9%); while New York and Chicago experienced an annual growth rate of 6%. Improving Housing Markets (NAHB): According to NAHBs Improving Market Index, the list of housing markets that showed improvement for at least six consecutive months in housing permits, employment and home process, expanded to 101 in April from 99 in March. A total of 35 states are represented in the April list with at least 1 improving market, with Texas and Florida accounting for 12 and 9 markets respectively. Delinquencies & Foreclosure Starts & Sales (LPS): National delinquency rates dropped by 5% month-over-month in February to 7.6% and were 14% lower compared to last year. The foreclosure rate was almost flat over the previous month at 4.1%. In February, foreclosure starts declined 15% to 176k and foreclosure sales were 19% down on the month, after a sharp increase in January. The foreclosure inventory in judicial states remains at 6.5% of all homes compared with 2.4% of all homes in non-judicial states. The national pipeline ratio, defined as the number of homes in D90+ delinquencies and foreclosures divided by the 6-month average of foreclosure sales rates, is currently at 84 months in judicial states, with New York and New Jersey ranking as the worst states with 846 and 772 months respectively. This compares to an average pipeline rate of 33 months for non-judicial states. Construction Spending (Census Bureau): Construction spending in February was at a seasonally adjusted annual rate of $809bn, approximately 1% lower than in January and 6% higher than February 2011. Private construction accounted for $530bn of this amount, and nearly $250bn was spent on residential construction.
Kunal Singal
11
06 April 2012
7
Total Volume ($bn)
6 5 4 3 2 1 0
10/17
10/31
11/14
12/12
5/16
6/13
7/11
8/22
9/19
10/3
10/6 10/13 10/20 10/27 11/3 11/10 11/17 11/24 12/1 12/8 12/15 12/22 12/29 1/5 1/12 1/19 1/26 2/2 2/9 2/16 2/23 3/1 3/8 3/15 3/22 3/29 4/5
Customer Buy Customer Sell Dealer to Dealer
11/28
12/26
PRE-2005
2005-2007
POST-2007
12
3/19
5/30
6/27
7/25
1/23
2/20
8/8
9/5
1/9
2/6
3/5
06 April 2012
Fig. 3: Composition of Trading Activity for past 2 weeks for Customer Buy (left) and Customer Sell (right) transactions
0%
4% 2%
1% 8%
4% 2%
23%
IG Pre-2005 IG 2005-2007
11%
IG Pre-2005 IG 2005-2007
31%
54%
Housing Market
Although the most recent release of Case-Shiller and other home price indices indicate that home prices were still falling nationwide, more recent data on home prices have been increasingly optimistic. Based on the historical strong correlation between home prices and the number of months of total home supply, home prices may have began to stabilize or even started to increase in some markets in the past few months. In this article, we look at the supply/demand dynamic of the housing market. Housing demand should be slightly stronger going forward due to the continued economic recovery, falling unemployment and robust investor demand. Future housing supply will depend on liquidation speed of the shadow inventory. We expect the liquidation of distressed properties to increase by 20% in 2012 as the servicer settlement is largely resolved, and nationwide home prices could fall by approximately 3% due to the increase of distressed home sales. However, if servicer liquidation of these distressed properties does not increase, home prices could flatten or rebound slightly in 2012. Home prices are low to historical standards, and we think there is more upside risk than downside risk to our forecast. For non-agency RMBS investors, deals with a large delinquency pipeline should benefit the most from home price stabilization as reduction of the distressed liquidation discount will increase the recovery rate.
13
06 April 2012
insurance payment assuming an FHA loan with a 3.5% down-payment, housing affordability is still at historical high (figure 2 right).
Fig. 1: Personal income vs home prices (left) and rental prices vs home prices (right)
1993=100
400
350
14000
12000
300
250
Rental prices* 200
250
200
150
150
100
2000 0 Dec-11
100
Dec-86
Dec-91
Dec-96
Dec-01
Dec-06
50 1986
Fig. 2: Mortgage payment on median house price as % of household income (left) and home affordability index (right)
% 26
220
24
22
20 18
16
120
14
12 Mortgage payment as % of income Jan-00 Jan-04 Jan-08 Jan-12
100
80 Jan-02
10 Jan-96
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Housing demand: After the expiration of first-timer home buyer tax credit program in 2010, the demand for housing has improved steadily. Going forward, the net demand for housing should come primarily from two sources: first-time home buyers and investors. We think the demand from firsttime homebuyers will be limited. However, the demand from investors should stay strong in the near future.
14
06 April 2012
Household formation slowed down in 2008 when the recession started, but it has increased recently as the economy recovers (Figure 4 left). Although there is some pent-up demand for new household formation, first-time home buyers as a percent of home sales has remained low since the expiration of tax credit (Figure 4 right). Figure 5 left shows that about 50% of first time home buyers are in the age group of 25-34; however, the unemployment rate or underemployment rate of this age group is also higher (Figure 5 right). In addition, the desire of this age group to own a home may be tamped by the fact that home prices fell sharply during most of their adulthood. In addition, this group generally has higher student loan debt and lower income compared with previous generations. Thus, we expect the increase of housing demand from first time homebuyers to be limited.
Fig. 4: Household formation(left) and % sale to first-time home buyers (right)
thousands 3,000
2,500
% 55 50 45 40 35 30 Second expiration date of the tax credit
2,000 1,500
1,000
500 25 Feb-09 First expiration date of the tax credit Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12
15
06 April 2012
Fig. 5: age group distribution of first time homebuyers (left) and unemployment/under-employment rate by age group (right)
Years 60
50 40 30 20 10
All Buyers
First-time
Repeat Buyers
% Underemployment
% Unemployed
18-29
65+
Lured by attractive financing and high rental yield, investor demand for housing has increased in the past year (Figure 6 left) and will likely stay strong in the near future. In some major MSAs, the gross rental yield is over 10% (Figure 6 right). Separately, because net rental unit completion will not increase significantly until late 2013, rents will likely continue to increase over the next two years as the economy improves (Figure 7 left). In addition, a few recent REO rental initiatives, such as Fannie Maes REO rental program, if successful, will be a catalyst to bring more capital to the investors. Thus, we believe that investor demand will likely be strong in the near future.
Fig. 6: Investor share of total existing home sale (left) and gross rental return in some major MSA (right)
24% 22%
20%
15%
10%
5%
0%
16
06 April 2012
Fig. 7: Historic and projected rent growth(left) and net rental unit completion (right)
Hist 2yr Change Proj 2yr Change
mn 40
30
20
10
Home supply: Housing supply largely comes from three sources: existing homes, new homes and distressed homes. We expect that the supply of homes will be largely stable or slightly increase in the near future, with decreased supply of existing and new homes largely compensated by the increased supply of distressed. Figure 8 shows there was moderate decline of supply from existing homes in the past few years. We expect that the existing housing supply will be limited in the future unless home prices rebound as current homeowners likely continue to suffer from negative equities. In addition, new home supply declined substantially in the past five years. The future supply of new homes should also be limited, because single family construction in the past few years has been depressed. Housing completions of single family homes reached a record low in 2011, and are likely not going to increase soon. Distressed home supply on the market has been quite stable in the past few years in spite of a huge shadow inventory. Going forward, the increase of home supply likely will largely depend on the liquidation speed of the distressed inventory. Although most servicers expect a moderate pick up in liquidations this year, so far there has not been any evidence of increase. RealtyTrac data shows that servicers were able to process 350k foreclosure filings per month before the robo signing incident in late 2010. However, they were only able to process about 200k foreclosure filings in 2011. Even after the servicer moratorium was lifted in late 2011, the total foreclosure filing only increased slightly. With the servicer settlement largely resolved and the clarification of the new servicing standard, we expect the liquidation speed to increase moderately. However, there are still a few issues that could limit the increase of liquidation speeds. First, some of the big servicers have reached their capacity for processing foreclosures because of increased scrutiny of their foreclosure operations. In contrast, some of the smaller servicers have extra capacity and can increase foreclosure filings, but in judicial states, significant backlogs in the legal system should limit foreclosure processing speeds. However, at minimum, short sale volumes should increase in 2012 due to increased willingness from banks to write down 2nd liens as well as settlement-related incentives. Thus we expect a moderate increase of liquidation speed of the shadow inventory.
17
06 April 2012
Fig. 8: Source of housing supply (left) and realtytrac foreclosure filing (right)
mn Units 8 7 6 5 4 3 2 1 0 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11
Foreclosure Filing
250
200
Robo signing
150
100 Jan-07 Jan-08 Jan-09 Jan-10
Future home price projection: There are more optimistic reports on the home prices in the media recently. NAR survey reported increased foot traffic at open houses, and some home builders recently reported strong demand for new housing. In addition, a few servicers also reported that recent REO liquidations brought in multiple offers and the liquidation discount has decreased. Figure 9 demonstrates that there is a strong correlation between number of months of housing supply and home prices. Due to both a moderate increase in demand and limited supply, the number of months of housing supply has dropped to a seven-year low. There is evidence that home prices may have begun to rise.
Fig. 9: housing inventory measured by number of months of supply vs corelogic home price index
Inventory for sale/ monthly sales 12
Y-o-Y (inverted) %
-20
11
10 9
Months' supply of 1-family homes (6-mon lead, lhs) Case-Shiller 20 city home price (rhs)
-15
-10 -5
0
8
7
6
5 4
5 10
15 20
However, home price stabilization highly depends on how fast the distressed home supply increases. In our base case forecast, distressed liquidation volumes will increase by 20% in 2012, causing overall nationwide home prices to decrease by 3% by the end of 1Q2013, largely due to a shift in index composition. However, if servicers do not increase the liquidation rate of the shadow inventory, home prices may increase slightly in 2012. Home prices are low in the historical context, and housing affordability is at a historical high. We think downside risk is abating, and upside risk dominates our forecast.
18
06 April 2012
The most recent CoreLogic home price index release for Feb 2012 offers a hint of the home price path in 2012. Nationwide, home prices increased by 0.7% m-o-m, and decreased 0.8% y-o-y excluding distressed home sales. However, including distressed sales, home prices decreased by 0.8% m-o-m and 2% y-o-y. Going forward, if distressed sales do not increase, home prices could record an increase for 2012, even including distressed sales. However, if the distressed sales increase by 20% as we expect in our baseline forecast, home price will continue to fall during 2012. Impact on the RMBS market: Even if national home housing indices drop over the next year, it is possible that REO prices remain flat or increase slightly due to increased investor demand, which should have a positive impact on severities. RMBS deals with sizable delinquent pipelines will benefit the most from a home price stabilization or rebound. Separately, more optimism on future home prices may reduce the incidence of strategic default for underwater borrowers.
Update on non-agency current pays: historical returns and various metrics for calculating carry
Many investors have a clear preference for current-pay bonds as returns are less dependent on spread tightening or future price appreciation. Within the universe of current pay bonds, there is a wide range of metrics used to calculate carry and expected return for these securities, leading to very different opinions on relative value. In this article, we analyze the historical performance as well as projected returns under various carry metrics for some representative current-pay bonds. Finally, we conclude the article with our relative value recommendations based on this analysis. Historical returns: Figure 1 shows the 1-year historical return for sample bonds across sectors. We separate total returns for each bond into historical price return and the realized carry return. Realized 12-month returns across most non-agency bonds ranged from a high of 8% for the sample prime fixed bond mainly due to high carry, to a low of -10% for POA Sr Mezz and -8% for Alt-B floaters due to low carry and spread widening. Next, we show a proxy for the historical sharpe ratio of various RMBS bonds by comparing historical risk (range of yields over the past 12 months) versus historical return (12-month realized return) in Figure 2. Over the past 12 months, prime fixed bonds performed the best according to this metric due to a combination of spread compression and high current carry; in addition, certain subprime front-pay sequential and seasoned mezz bonds also performed well according to this metric.
Sector Prime Fix Prime Hyb Alt-A Fix Alt-A Hyb Alt-B Flt POA Sr Mezz POA SSNR Subpr FP Seq Subpr FP PR Subpr Seas Mezz Subpr Seas Mezz
Bond Latest price WFMBS 07-11 A96 94 WFMBS 05-AR16 3A2 92 CMALT 07-A3 1A1 CMLTI 07-AR1 A3 GSAA 06-11 2A2 DSLA 2007-AR1 2A1B SAMI 06-AR7 A1A RAAC 2007-SP3 A1 FFML 2006-FF11 2A3 FHLT 2003-B M1 MSAC 04-NC8 M2 72 53 43 22 57 76 55 79 87
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Fig. 2. Historical sharpe ratio: yield vol vs. realized yield, last 12m
5
Realized Yield (%)
0 Prime Hyb WFMBS
Subpr FP Seq RAAC Alt-A Hyb Subpr Seas CMLTI Mezz FHLT
POA SSNR SAMI
-5
-10 -15
Projected performance
In the following section, we compare various yield and carry metrics for sample current pay bonds across the non-agency spectrum (figure 3). There are a number of ways to calculate carry, depending on whether interest and/or principal are included and based on the time horizon; relative value preferences depend on which of these metrics are used for comparison purposes. The metrics used for this analysis include the following: Projected yield to maturity in base (-3% HPA) and stress (-8% HPA) scenario. The remaining calculations are based on the base case scenario. Current cashflow yield: projected bond P&I payments (next 12m) divided by bond price Current interest yield: projected bond interest (next 12m) divided by bond price Projected return breakout: We separate the expected return into a carry component and an expected price return component. The expected carry is calculated as total principal + interest payments net of writedowns over the next 12 months. Next, the future price in 12 months is calculated such that the 12-month total holding period return equals the annualized yield-to-maturity in the base case scenario.
In Figure 4, we calculate the forward price projection for various bonds using the same approach as discussed above. For each calculation, we assume that the bondholder earns the annualized yield to maturity in every 12-month period by buying the bond at the initial price, earning the carry net of writedowns over that period, and selling the bond at the end of the period at the calculated forward price. For example, if an investor bought the prime fixed bond today at $94 and earned the expected carry over the next 12 months, they would have to sell the bond in 12 months at 94.5 in order to realize a 6.3% return over that period. Forward prices trend upward for the prime fix, prime hybrid, and Alt-A fixed bonds and some subprime seasoned mezz bonds, while other bond types have gradual price declines over time either due to an implied writedown feature on certain bonds or higher writedowns and/or worsening collateral composition over time. Finally, in Figure 5 we calculate a forward-looking projected risk vs. return metric, similar to the historical sharpe-ratio calculated in figure 2. On a forward-looking basis, the subprime front-pay sequential and the Alt-A fixed bond look most attractive according to this metric.
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Sector
Prime Fix Prime Hyb Alt-a Fix Alt-A Hyb Alt-B Flt POA Sr Mezz POA SSNR Subpr FP Seq Subpr FP PR
Bond
72 53 43 22 57 76 55 79
Fig. 4: Projected forward price holding base yield constant over time: Prime/Alt-A (left) and POA/Subprime (Right)
120 100
100 80 60
80 60 40 20 0
Alt-A Fix CMALT Alt-A Hyb CMLTI Alt-B Flt GSAA Year
40 20 0
Year
Fig. 5: Future risk vs. return: base expected return vs. projected yield range across model scenarios
10
POA SSNR SAMI Subpr FP PR FFML Alt-B Flt GSAA Subpr Seas Mezz FHLT
Base Yield
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After a brief hiatus, there was new issuance in consumer ABS sector. The investor appetite was high for new issuance as all the three deals were upsized and priced at tight spreads. The 2-year A tranche in the AMOT deal was upsized from $500mn and was priced close to the FORDF 2-year senior tranche issued in February. SLMAs private student loan ABS was upsized by $220mn and the 4-year A2 tranche was priced at 240bp, tighter by 15-20bp than the expectation. The structure of the deal was similar to SLMA 2011B, but with shorter WAL through the capital structure. WFNMT issued the second 7-year private label credit card deal of the year. As we had pointed out in our previous article, the longer-dated credit card universe currently trades at a premium and there is limited paper in the market with maturity beyond 2015 creating positive demand technicals in this space. As a result, the 7-year deal to get upsized and price at 140bp spread to the swap curve. WFNMT is one of the wider private label credit card issuers and the strong execution illustrates the demand for higher yield assets.
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The final approach includes new cashflow assumptions accounting for the reduced basisrisk due to the recent legislation that allows holders of FFELP loans to shift from the earlier 3m CP special allowance payment index to 1m Libor. Under the proposed approach, the loss timing curve would have applied on the loans that were in repayment, deferment or forbearance; contrary to previously assumption where the loss-timing curve was applied only on the loans in repayment. The finalized approach applies a shorter, more front-loaded curve, but applies it only to the loans in repayment.
The final approach incorporates the rest of the proposals. Along with the release of the finalized approach, Moodys has placed 194 bonds from 24 deals with an outstanding amount of $7.5bn on review for possible downgrade, less than the $10bn FFELP ABS as expected under the proposal. The most significant change from the proposal is the incorporation of lower basis risk with the implementation of the Consolidation Act that affects the shift in the SAP index from 3m CP to 1m Libor. We had pointed out in a previous article, there remains some basis risk even after the shift due to timing mismatch, but it reduces the volatility in basis-risk as the 3mL-1mL basis is significantly less volatile than the previous 3m CP- Libor basis (Figure 3). This reduces the impact of higher cumulative default assumptions as applied in the latest methodology, as the stress spikes in the basis are lower than that under the 3m CP-Libor basis. In Moodys supplemental report to the new criteria, they have highlighted similar reasoning to reduce the new spread and spike assumptions (Figure 4).
Fig. 3: Rolling one month volatility is lower for the 3mL-1mL basis
bp 300 250 200 150
1 m Vol 3mL-CP
1m Vol 3mL-1mL
100 50 0 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Source: Federal Reserve, Bloomberg, Nomura Securities International
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Sep-10
Mar-11
Sep-11
Mar-12
25%
20%
15%
10%
5%
0%
GM Ford Toyota Chrysler Nissan Honda Hyundai Kia VW Subaru 0% 5% 10% Market Share 15% 20%
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
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CMBS Market
CMBS spreads widened significantly as concerns regarding Spains ability to service its debt burden and disappointment with the latest commentary from the Federal Reserve weighed on the broader markets. In addition, CMBS investors remained concerned regarding increased secondary supply from Maiden Lane dispositions. On the week, last cash flow super senior spreads widened approximately 10-40bp and are now trading in a range of 150 to 225bp over swaps. GG10 A4s gave up all of their 2012 gains, ending the week at 265bp over swaps, 55bp wider on the week. We recommend investors continue adding new issuance paper and higher quality super senior bonds that are highly unlikely to suffer principal losses. Although this weeks nonfarm payrolls number was weaker than expected, we believe that the economy continues to improve, which will likely result in further long-term tightening and increased stability for lower quality super senior and AM bonds. These tranches may also benefit from increased demand for longer duration spread product in a low-rate environment. In addition, we recommend selectively adding higher quality AM and AJ bonds as improving economic indicators are likely to result in lower than expected losses to the trusts. Volume from both the secondary markets and new issuance continues to be met with good investor demand as investors may be taking advantage of the pullback. According to TRACE data, prices on investment-grade bonds traded in the secondary market declined along with dealer inventories (Figure 1). Since last Thursdays close, $4.6bn in investment grade CMBS bonds exchanged hands in the secondary markets, significantly below last weeks total of $5.4bn and slightly below than the 2012 weekly average of $4.8bn.
Fig. 1: Investment grade dealer volume vs cash prices (5-day moving average)
1,200
108
900
600 300
0
-300 Net Dealer Buy (lhs) -600 103 104
12-Mar
19-Mar
26-Mar
9-Jan
13-Feb
20-Feb
27-Feb
16-Jan
23-Jan
30-Jan
CMBX prices within the AAA stack finished sharply lower on the week, with AJ tranches underperforming, falling $3.16 on average across all series and tranches. AM tranches fell $2.29 on the week, followed by a $0.79 drop among super senior AAAs (Figure 2).
26
5-Mar
6-Feb
2-Apr
Price
06 April 2012
Implied spreads in CMBX.NA.4 finished the week significantly wider, led by a 93bp increase among AJs, pushing the spread to 915bp over swaps. AM and AAA tranches finished the week 55bp and 17bp wider, and now stand at 449bp and 167bp over swaps, respectively (Figure 3). Volatility for all tranches increased moderately on the week. Corresponding three-month average daily moves for AAA, AM, and AJ tranches stand at 3.1bp, 6.1bp, and 11.8bp over swaps.
1200
Composite Spread
1000
800 600 400
AAA AM
AJ
200
0
In the news
New issuance update
Two CMBS deals priced this week. First, JPMorgan and Wells Fargo priced the $132mn securitization on behalf of Rialto Capital backed primarily by distressed assets. In addition, UBS priced the single-asset deal backed by the Fontainebleau Hotel. According to Commercial Real Estate Direct, four conduit deals totalling $3.75bn deal are expected to launch in the second quarter. In addition, one single borrower issue, a $450mn deal backed by the Carousel Mall, are also expected in the second quarter.
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CSFB 2004-C1 (Figure 4). None of these loans are delinquent, and the majority report DSCRs in excess of 1.20x.
Balance Pct Deal 7,544,883 0.8% 4,228,451 0.5% 2,487,325 0.3% 2,072,770 0.2% 2,487,325 0.3% 18,820,753 2.0% 8,539,813 0.8% 4,974,648 0.4% 4,103,239 0.4% 3,399,342 0.3% 21,017,042 1.9%
CITY Port Angeles Yakima Eureka Kennewick Twin Falls Pasco Salt Lake City Redding Richland
STATE WA WA CA WA ID WA UT CA WA
NCF DSCR 2.10 1.22 3.09 4.75 0.41 1.38 2.33 0.93 2.94
Three additional assets were previously owned by Red Lion Hotels but have been sold to third parties. In particular, the recently securitized Red Lion Hotel loan in GSMS 2011-GC5 provided acquisition financing for Lowe Enterprises to purchase the asset from Red Lion Hotels (Figure 5).
Term: Performance for five-year loans remained weak for loans maturing in the first quarter as only 36% paid in full. Although historically, we have seen little difference between the performance of loans with seven or ten-year terms, seven-year loans maturing in the first quarter were significantly less likely to pay in full, as 57% of seven-year loans and 81% of ten year loans paid in full.
This article is a reprint of our previously published Special Topics piece published on April 4, 2012.
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Debt Yield: Loans with higher debt yields remain more likely to refinance, while loans with lower debt yields are more likely to be resolved with a loss. Loans maturing in the first quarter with debt yield between 6% and 8% are most likely to remain outstanding, and 69% of loans with debt yield over 8% paid in full, versus only 29% for loans with lower debt yields. Location: Historically, loans on properties located in major metropolitan areas are more likely to be resolved at maturity. However, for loans that matured in the first quarter, the importance of geographic location in determining refinanceability declined. We found that 58% of loans on properties in Tier 1 locations paid in full, versus 51% and 52% for loans on properties in Tier 2 and Tier 3 locations, respectively. Balance: Loans with smaller balances are more likely to be resolved at maturity. For loans that matured in the first quarter, 66% of those with balance under $10mn paid in full, dropping to only 38% for those with balance exceeding $100mn. Property type: Among loans maturing in the first quarter, 60% of those secured with retail properties paid in full. Multifamily and hotel loans maturing in the first quarter continued to underperform, and only 41% and 30% of these loans paid in full, respectively. Loans on office properties performed slightly worse than average, with 47% paying in full.
Methodology
Each quarter, we examine the loans that reached their initial maturity date over the course of the quarter to determine the factors most likely to indicate a borrowers ability to refinance. In addition, we compare these loans with those that matured in the preceding two years to track changes in the lending environment. We classify matured loans into eight categories, with three categories describing the current state of outstanding loans and five describing the final state of resolved loans: Extended: Outstanding loans that are not seriously delinquent whose maturity date has been extended. Seriously Delinquent: Outstanding loans that are 90+ days delinquent, in foreclosure or REO. Outstanding: Outstanding loans that are not seriously delinquent and have not been extended. Loss: Loans that were resolved within a year prior to their initial maturity date or ARD and suffered a loss upon resolution. At Maturity: Loans resolved within three months of their initial maturity date or ARD that did not suffer a loss. Late: Loans resolved more than three months past their initial maturity date or ARD that did not suffer a loss. Early: Loans resolved between four and twelve months prior to their initial maturity date or ARD that did not suffer a loss. Term: Loans that were resolved or defeased more than a year prior to their initial maturity date or ARD. These loans were likely term defaults or prepayments and did not face increased risk due to pending maturity. We eliminate these loans from the analysis of factors that influence repayment at maturity.
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Maturity Pipeline
As of the March 2012 remittance, $37.5bn in non-defeased conduit loans originally due to mature in 2012 remain outstanding, down from $43.1bn in of the January 2012. Of this total, $5.5bn has been extended and $4.3bn is seriously delinquent (90+ days, in foreclosure or REO). Maturity risk is likely to peak in 2016 and 2017 when approximately $120bn in maturing loans that are not seriously delinquent are expected to come due (Figure 1).
Defeased
Extended Seriously Dlq
Outstanding
2012
Source: Trepp and NSI
2013
2014
2015
2016
2017
Universe: Conduit CMBS Deals
Among the loans that are now scheduled to mature in 2012 that are not seriously delinquent, 37% ($11bn) have five-year terms, and we expect these loans to be less likely to refinance than those securitized in earlier vintages (Figure 2). These loans were primarily originated in 2007 and suffered from a combination of weaker underwriting standards, as well as limited economic growth and property devaluation during their loan term. Based on the performance of five-year loans that matured in 2011, we expect that approximately half of these loans will be resolved by year-end. Because of the decline in credit availability in the second half of 2007, the majority of five-year loans that mature in 2012 are due during the first half of the year (Figure 3). In contrast, maturity dates for loans with ten-year terms are concentrated in the second half of the year, reflecting the pick-up in lending that occurred after the end of the recession in November 2001. As a result, we expect that 2012 maturity risk will peak in the second quarter.
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120
100
80
60 40
3 2
1 -
20
2012 2013 2014 2015 2016 2017 5 Year 7 Year 10 Year
5 Year
Source: Trepp & NSI
7 Year
10 Year
Performance at maturity
Among loans that came due in the first quarter, 49% were resolved by the end of the quarter, a 5% decline from the resolution percentage for the previous quarter. Currently, 10% of the loans due to mature in the first quarter are seriously delinquent and an additional 9% have been modified to extend the maturity date (Figure 4). Currently, a total of $8.6bn in non-defaulted mortgages is due to mature in second quarter. The performance of these loans will be significantly impacted by the performance of a single asset. Currently, 22% of loans initially due to mature in the second quarter have been extended; however, almost half of this amount is due to the Beacon D.C. and Seattle Portfolio loan. This loan was initially scheduled to mature in May 2012 but was given a five-year extension.
90%
80%
Outstanding
Extended
70%
60% 50%
40%
30%
Early Loss
20%
10%
0% 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12
Source: Trepp & NSI
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90%
80% Outstanding Seriously DLQ
90%
80%
Outstanding
Seriously DLQ
70%
60% 50%
70%
60% 50%
Extended
At Maturity Early
Extended Late
At Maturity
40%
30%
40%
30%
20%
10%
Loss
Early Loss
20%
10%
0% 5Y
Source: Trepp & NSI
0% 7Y 10Y 5Y
Source: Trepp & NSI
7Y
10Y
In spite of more aggressive underwriting in 2007, the five-year loans that are now reaching maturity appear to be performing in line with the recent average (Figure 7). Excluding loans that were resolved during their term, 39% of loans that matured since January 2010 paid in full by maturity. An additional 24% either resolved late or have been extended, and, similarly, 24% either suffered a loss or are now seriously delinquent (and therefore likely to suffer a loss). Among five-year loans that matured in the first quarter of 2012, 36% paid in full, in line with the historical average. Further, the percentage of first quarter 2012 successful resolutions is likely to increase slightly over the next three months, as we consider loans that pay off no more than three months late to have paid At Maturity.
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Extended
At Maturity Early
Loss
Outstanding, not Seriously DLQ Loss or Seriously DLQ Paid in Full Extended
Source: Trepp & NSI
34
Resolution Distribution
06 April 2012
90%
80% Outstanding Seriously DLQ
90%
80%
Outstanding
Seriously DLQ
70%
60% 50%
70%
60% 50%
Extended
At Maturity Early
Extended Late
At Maturity
40%
30%
40%
30%
20%
10%
Loss
Early Loss
20%
10%
0% Tier 1
Source: Trepp & NSI
Tier 2
Tier 3
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Outstanding
Seriously DLQ
Extended
At Maturity Early
Extended Late
At Maturity
Loss
Early Loss
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06 April 2012
90%
80% Outstanding Seriously DLQ
90%
80%
Outstanding
Seriously DLQ
70%
60% 50%
70%
60% 50%
Extended
At Maturity Early
Extended Late
At Maturity
40%
30%
40%
30%
20%
10%
Loss
Early Loss
20%
10%
0% OF RT MF LO OT
0% OF RT MF LO OT
Loans with balance over $100mn that matured in the fourth quarter of 2011
We highlight 23 loans with balance over $100mn that were either originally or currently scheduled to mature in the first quarter of 2012 that were not resolved a year prior to their maturity date (Figure 16). During the first quarter, five of these loans transitioned from current to non-performing matured, indicating increased likelihood of default at maturity. Two of these loans continue to perform, indicating that the borrower continues to actively support the loans while arranging new financing. Three of these loans were resolved by the end of the year, and three additional loans were resolved th th in the first quarter of 2012. All three newly resolved loans, 9 West 57 Street, 9 West 57 Street (Land), and Mandarin Oriental, are located in New York City, further evidence of the increased likelihood of refinancing for properties located in Tier 1 cities.
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Fig. 16: Large loans with original or current maturity date in the fourth quarter of 2011
Status Loss Loan Nam e Balance Deal Nam e BACM 2007-2 BACM 2007-3 CD 2007-CD4 CSMC 2007-C3 JPMCC 2007-LDPX LBUBS 2002-C2 WBCMT 2007-C30 Pct Deal Maturity MSA 3.6% 3.8% 3.3% 2.9% 3.1% 2.4% 1.7% 3.7% 2.1% 2.0% 2.4% 3.8% 6.4% 6.4% 5.6% 3.9% 3.0% 2.2% 6.2% 2.7% Mar-12 Mar-12 Feb-12 Mar-12 Mar-12 Feb-12 Feb-12 Jan-12 Feb-12 Jan-12 Jan-12 Mar-12 Mar-12 Jan-12 Feb-12 Jan-12 Jan-12 Jan-12 Jan-12 Mar-13 Mar-13 Feb-15 Jan-13 Dec-13 Feb-16 Apr-15 Feb-17 New York New York Washington Miami New York Washington Fayetteville, AK San Francisco San Francisco Washington Washington Chicago Las Vegas LA / San Diego Las Vegas Washington New York Washington Washington Washington Denver Atlanta Miami Pittsburgh NA Prop. Type Debt Yield OF OF OF LO OF RT Land MF RT OF OF MF MF OF RT OF LO LO MF LO LO MF OF RT RT RT LO NA NA 18.8% 8.9% 5.9% 26.9% 12.0% 7.9% 12.0% 22.4% 22.4% 7.0% 7.0% 7.0% 8.4% 7.4% NA NA NA 6.0% 6.0% 10.4% 5.9% 10.6% 7.4% NA -1.6%
One Park Avenue * One Park Avenue* At Maturity 9 West 57th Street Mandarin Oriental Franklin Tow er Dadeland Mall 9 West 57th Street (Land) Outstanding Sussex Commons I & II Pinnacle Hills Promenade Non-Perf Mat Pacific Shores * Pacific Shores * Georgian Tow ers * Georgian Tow ers * 200 West Adams Fashion Outlet of Las Vegas Southern California Portfolio FC Loew s Lake Las Vegas Hyatt Regency- Bethesda REO Riverton Apartments Extended Renaissance Mayflow er Hotel Renaissance Mayflow er Hotel Rockw ood Ross Multifamily Park Central Discover Mills Southland Mall Galleria at Pittsburgh Mills Four Seasons Aviara Resort - Carlsbad, CA
102,583,000 BACM 2007-1 140,000,000 MLCFC 2006-4 92,742,628 92,742,628 58,000,000 67,000,000 100,000,000 103,000,000 123,449,000 117,000,000 140,000,000 225,000,000 200,000,000 200,000,000 175,000,000 114,828,612 135,000,000 107,269,889 133,000,000 186,500,000 BACM 2007-1 GECMC 2007-C1 CD 2007-CD5 COMM 2007-C9 CD 2007-CD4 COMM 2007-C9 GCCFC 2007-GG9 CD 2007-CD4 GCCFC 2007-GG9 CD 2007-CD4 BACM 2007-3 BACM 2007-3 BACM 2007-3 CSMC 2007-C2 JPMCC 2006-LDP9 JPMCC 2007-LDPX MSC 2007-HQ11 WBCMT 2007-C30
Loans with balance over $100mn maturing in the first quarter of 2012
We highlight 23 loans with balance over $100mn that were either originally or currently scheduled to mature in the first quarter of 2012 that were not resolved a year prior to their maturity date (Figure 17). Four of these loans have already paid in full, and the Extendicare Portfolio paid prior to its modified maturity date. In addition, seven of these loans, including the $1.9bn Beacon D.C. & Seattle Pool, have been extended. Among the 14 outstanding loans scheduled to mature in the second quarter that are not seriously delinquent, we believe that most will fail to pay in full by maturity. Although six are located in Tier One locations, these loans report weaker debt yields. Servicer comments for one of these six loans, One Sansome Street, indicate that the borrower has received an offer for new financing with an anticipated payoff date of April 30, 2012. However, it remains unclear whether any of the remainder will be able to pay in full at maturity. Only two assets, the Lake Marriott and Orchard Parkway loan and The Streets at Southpoint loan, have debt yields exceeding 10%. Special servicer comments indicate that the Lake Marriott and Orchard Parkway borrower has requested a modification. GGP, the borrower for The Streets at Southpoint loan, has given no indication that they have secured takeout financing for this asset.
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Fig. 17: Large loans with original or current maturity date in the first quarter of 2012
Deal Nam e BACM 2002-2 BACM 2005-5 BACM 2007-2 BSCMS 2007-PW16 CSMC 2007-C4 GCCFC 2007-GG9 GECMC 2007-C1 GSMS 2005-GG4 JPMCC 2005-CB11 JPMCC 2005-LDP2 JPMCC 2007-LD11 Loan Nam e Crabtree Valley Mall One Renaissance Square Beacon D.C. & Seattle Pool * Beacon D.C. & Seattle Pool * 245 Fifth Avenue Lake Marriott and Orchard Parkw ay Manhattan Apartment Portfolio The Streets at Southpoint Southridge Mall CityPlace Corporate Center 315 Park Avenue South GSA Portfolio LBCMT 2007-C3 Bay Colony Corporate Center 110 William Street Bethany Phoenix Portfolio I LBUBS 2005-C2 The Woodbury Office Portfolio II - A note LBUBS 2006-C7 Extendicare Portfolio * LBUBS 2007-C1 Extendicare Portfolio * LBUBS 2007-C2 Extendicare Portfolio * LBUBS 2007-C6 Greensboro Park 100 Wall Street One Sansome Street MLMT 2007-C1 Gw innett Place Tow n Center at Cobb MSC 2005-IQ10 195 Broadw ay MSC 2007-HQ12 Columbia Center Beacon D.C. & Seattle Pool * MSC 2007-IQ14 New York City Apartment Portfolio Roll-Up Tabor Center & U.S. Bank Tow er Roll-Up Beacon D.C. & Seattle Pool * MSC 2007-IQ15 Hilton Washington DC MSDWC 2002-HQ Woodfield Shopping Center * MSDWC 2002-TOP7 Woodfield Shopping Center * WBCMT 2007-C31 Beacon D.C. & Seattle Pool * WBCMT 2007-C32 Beacon D.C. & Seattle Pool * ING Hospitality Pool(3)* Three Borough Pool WBCMT 2007-C33 ING Hospitality Pool(3)* Balance 103,600,000 274,778,222 338,197,017 140,000,000 107,250,000 151,094,965 124,000,000 116,132,823 219,000,000 284,000,000 156,600,000 123,000,000 104,500,000 108,926,767 117,399,060 139,569,073 115,000,000 280,000,000 380,000,000 113,874,926 195,000,000 300,000,000 548,155,702 215,000,000 292,821,240 292,821,240 283,850,000 133,000,000 283,850,000 Pct Deal Maturity MSA Prop. Type Debt Yield Apr-12 Raleigh RT 17.2% 6.5% Apr-12 Phoenix OF 7.7% 11.2% May-17 Various OF 5.7% 11.4% May-17 Various OF 5.7% 7.2% May-12 New York OF 6.0% 1.8% Apr-12 San Jose OF 12.7% May-12 New York MF Stale 4.7% Apr-12 Durham, NC RT 15.5% 9.0% Apr-15 Milw aukee RT 7.4% 5.8% Apr-12 Saint Louis OF 7.8% 4.3% Jun-12 New York OF 7.6% 5.5% May-12 Various OF 7.3% Jun-12 Boston OF 3.8% 5.4% Jun-12 New York OF 8.4% 4.3% Jun-17 Phoenix MF 6.4% 9.1% Dec-15 New York OF Stale May-12 Various HC Stale May-12 Various HC Stale May-12 Various HC Stale 3.9% Jun-15 Washington OF 6.2% 4.2% Jun-12 New York OF 5.8% 5.0% Jun-12 San Francisco OF 5.3% 3.1% Jun-12 Atlanta RT 6.3% 7.6% Jun-12 Atlanta RT 7.3% Apr-12 New York OF 7.9% 23.2% May-15 Seattle OF 5.1% 6.9% May-17 Various OF 5.7% 4.5% Apr-12 New York MF Stale 7.0% Apr-13 Denver OF 6.5% 12.7% May-17 Various OF 5.7% 11.2% Jun-12 Washington LO 8.6% Apr-12 Chicago RT 27.0% Apr-12 Chicago RT 27.0% 5.4% May-17 Various OF 5.7% 8.1% May-17 Various OF 5.7% 7.9% Jun-12 Various LO 9.1% 3.8% May-12 New York MF Stale 8.2% Jun-12 Various LO 9.1% Status At Maturity Outstanding Extended Extended Outstanding Outstanding Loss Outstanding Extended Outstanding Outstanding Outstanding At Maturity Outstanding Extended Extended Late Late Late Extended Outstanding Outstanding Outstanding Outstanding At Maturity Extended Extended FC Extended Extended Outstanding At Maturity At Maturity Extended Extended Outstanding FC Outstanding
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Disclosure Appendix A1
ANALYST CERTIFICATIONS We, Ohmsatya Ravi, Ankur Mehta, Dhivya Krishna, Arun Manohar, Gaetan Ciampini, Paul Nikodem, Lea Overby, Steve Romasko, Kunal Singal and Sean Xie CFA, hereby certify (1) that the views expressed in this report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer name BANK OF AMERICA CORP BANK OF NEW YORK MELLON CORP/THE BANK OF NEW YORK MELLON/THE FEDERAL NATIONAL MORTGAGE ASSOCIATION JP MORGAN CHASE INTERNATIONAL HOLDINGS
A1 Nomura Securities International, Inc has received compensation for non-investment banking products or services from the issuer in the past 12 months. A2 Nomura Securities International, Inc had a non-investment banking securities related services client relationship with the issuer during the past 12 months. A3 Nomura Securities International, Inc had a non-securities related services client relationship with the issuer during the past 12 months. A4 A Nomura Group Company had an investment banking services client relationship with the issuer during the past 12 months. A5 A Nomura Group Company has received compensation for investment banking services from the issuer in the past 12 months. A6 A Nomura Group Company expects to receive or intends to seek compensation for investment banking services from the issuer in the next three months. A7 A Nomura Group Company has managed or co-managed a publicly announced or 144A offering of the issuer's securities or related derivatives in the past 12 months. A9 Nomura Securities International Inc. makes a market in securities of the issuer.
Important Disclosures
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with sales and trading desk personnel in connection with obtaining liquidity and pricing information for their respective coverage universe. Valuation Methodology - Global Strategy A Relative Value based recommendation is the principal approach used by Nomuras Fixed Income Strategists / Analysts when they make Buy (Long) Hold and Sell(Short) recommendations to clients. These recommendations use a valuation methodology that identifies relative value based on: a) Opportunistic spread differences between the appropriate benchmark and the security or the financial instrument, b) Divergence between a countrys underlying macro or micro-economic fundamentals and its currencys value and c) Technical factors such as supply and demand flows in the market that may temporarily distort valuations when compared to an equilibrium priced solely on fundamental factors. In addition, a Buy (Long) or Sell (Short) recommendation on an individual security or financial instrument is intended to convey Nomuras belief that the price/spread on the security in question is expected to outperform (underperform) similarly structured securities over a three to twelve-month time period. This outperformance (underperformance) can be the result of several factors, including but not limited to: credit fundamentals, macro/micro economic factors, unexpected trading activity or an unexpected upgrade (downgrade) by a major rating agency.
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