While market participants remained glued to the topic of subprime and the future of the mortgage market, international influence on the sector also jumped onto the agenda at the International Quality & Productivity Center's Residential Mortgage-Backed Securities Forum in New York last week.
The impact that China has had on the expansion of the MBS market is something to watch going forward, noted Alec Crawford, head of agency MBS strategy at RBS Greenwich Capital. A lot of the growth in the MBS market has been a result of non-domestic buyers, he said. More specifically, "There is about $220 billion from the trade surplus in China, of which 70% is currently being used for U.S. dollar-denominated securities," he said. If there is a radical reshaping of fiscal policy, it would have a somewhat dramatic effect on the market - about 50 to 70 basis points on yield - Crawford said.
Crawford also discussed his outlook on the U.S. housing market, including current concerns such as home prices and mortgage credit performance.
He focused on the various pricing discrepancies in the housing market across the U.S. While New York, Boston and Chicago appear to be fairly valued, Miami is currently overvalued at 144%, which Crawford did not expect to continue. "We are seeing bubble pricing in Miami and some air will have to be let out." Undervalued locations include Texas at 77%. But with oil currently around $70 per barrel, Texas should swing upward in home value, which will also help with prepayments that have traditionally been slow in the state, Crawford said. On the contrary, the potential drop in pricing in Florida, which has typically been on the higher end of the prepayment spectrum, could negatively affect its rapid prepayment pace.
On the credit side, while U.S. prime foreclosures are less than 1%, REO and foreclosures in the subprime industry were at 6% and climbing, with new vintages taking three to four years to peak, Crawford said.
Focusing on foreclosure predictors, Crawford suggested that the CLTV ratio is better than FICO scores. "If there is not that much skin in the game then the easier it is to walk away," he said.
In terms of other credit concerns, investors seem to be walking away from purchase, high-CLTV and stated documentation loans right now, Crawford said. He added that mortgage originators are also going to become more critical going forward as investors will look to originators that have better-performing deals.
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