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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND
ANALYST CERTIFICATIONS.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
Global Securitized Products Weekly Securitized Products Strategy
Agency MBS
We maintain our short basis recommendation based on weak risk/reward. The Basel
committee softened its leverage ratio proposal, which reduces the SLR denominator and
would be incrementally positive for bank MBS demand if US regulators follow with similar
rules. We explore valuations in Agency CMOs across the curve and compare them with
pass-throughs and CMBS AAA.
Non-Agency MBS
For the last few years, the defining, and at times lone, driver of prepayment speeds in the
non-agency space has been equity position, but another variable remains: a potentially
expanding credit box. Using data provided by current mortgage issuance, we believe the
credit box is slowly beginning to open. We see this effect most amplified in post-reset Alt-A
ARMs, where always current speeds doubled in the second half of 2013, controlling for IO
status. We believe this is likely to continue into 2014.
CMBS
Market activity slowed to a near halt over the past two days, with many members of the
CMBS community attending the semi-annual CREFC conference. We thought the overall
tone was fairly optimistic. While there were definitely some concerns that were highlighted
and frequently discussed, our sense was at the market consensus remains reasonably
bullish. We discuss some of the more prevalent themes. We also take a look at the CMBS
exposure to JCP’s store closure announcement, CRE price changes in November, fourth
quarter real estate fundamentals and news on the 11 Madison Avenue loan.
Modeling and Analytics
Monthly Locus non-agency model report: high actual house price appreciation in 3Q 2013
leads to lower cumulative defaults and severities projections for January 2014; model
default rates undershot for Option ARM due to lower REO to liquidation rates; modification
rates for subprime loans continue to drop while share of principal forgiveness among all
modification types is increasing.
Research Analysts
GLOBAL HEAD
Roger Lehman +1 212 325 2123 [email protected]
AGENCY MBS
Mahesh Swaminathan +1 212 325 8789 [email protected]
Qumber Hassan +1 212 538 4988 [email protected]
Vikram Rao +1 212 325 0709 [email protected]
NON-AGENCY MBS/CONSUMER ABS
Marc Firestein +1 212 325 4379 [email protected]
CMBS
Roger Lehman +1 212 325 2123 [email protected]
Sylvain Jousseaume, CFA +1 212 325 1356 [email protected]
Serif Ustun, CFA +1 212 538 4582 [email protected]
EUROPEAN UPDATE
Carlos Diaz +44 20 7888 2414 [email protected]
MODELING AND ANALYTICS
David Zhang +1 212 325 2783 [email protected]
Table of Contents
Core Views 2
Agency MBS 3
Non-Agency MBS 10
CMBS 13
Modeling and Analytics 30
Focus on Locus 39
16 January 2014
Fixed Income Research
http://www.credit-suisse.com/researchandanalytics
FOR INSTITUTIONAL CLIENT USE ONLY
Focus on Locus New! CLO Bid List Calendar
www.credit-suisse.com/ locus
16
Ja
nu
ary
20
14
Glo
bal S
ecuritiz
ed
Pro
ducts
Weekly
2
Core Views Sector Trends Trade Ideas
Agency MBS Short MBS basis
Sell FN 3.5 vs. 5-yr and 10-yr swaps
Sell G2/FN 3.5 swap
Buy IOS 4.5 2010 versus rates
Housing
The rebound in housing should continue, albeit at a more moderate pace; we project gains of roughly 5% (FHFA all transaction) and 10% (Case Shiller) in 2014. We expect most of the major drivers behind the recent recovery in home prices to remain in place in 2014. We believe the slowdown in momentum is largely driven by two factors: a decline in affordability and a decline in distressed supply.
Prepayment We project roughly 20% and 18% drops in 30-year and 15-year speeds in January, respectively, driven by higher rates and weaker seasonality.
Non-Agency MBS
BWIC volumes were once again high heading into the ING list, with over $500MM out for bid on Tuesday and Wednesday. Prices across all sectors were modestly stronger. Post-reset Alt-A prepayment speeds, on the back of slightly more credit availability, are picking up across all LTV buckets.
We are slightly cautious at these levels, though we believe the next short-term move is slightly tighter. The credit curve remains flat.
We prefer a barbelling strategy of higher- and lower-beta sectors.
We prefer post reset clean Prime/Alt-A hybrids and fixed rate Alt-As among low-beta sectors. Longer reset clean Alt-A hybrids offer prepay and housing upside among lower-beta bonds.
CMBS
Market activity slowed to a near halt over the past two days, with many members of the CMBS community attending the semi-annual CREFC conference. We thought the overall tone was fairly optimistic. While there were definitely some concerns that were highlighted and frequently discussed, our sense was at the market consensus remains reasonably bullish. We discuss some of the more prevalent themes. We also take a look at the CMBS exposure to JCP’s store closure announcement, CRE price changes in November, fourth quarter real estate fundamentals and news on the 11 Madison Avenue loan.
Wider trading AMs remain our favorite trade and appear attractive to corporates, and other legacy CMBS. We also believe that some better quality AJs should be considered.
Differentiation is needed on premium super-seniors but some shorter duration bonds, like the A1As, are attractive.
Single-borrower deals have widened relative to new issue conduit and look attractive
We are concerned about newly issued BBB- bonds given the coming supply. Single-A bonds and super-seniors appear relatively more attractive.
Source: Credit Suisse
16 January 2014
Global Securitized Products Weekly 3
Agency MBS Strategy
We maintain our short basis recommendation based on weak risk/reward. MBS
valuations have richened to near six-month highs catalyzed by continued 100+% Fed
takeout and more recently a sharp drop in volatility. This could reverse heading into
FOMC at month-end. The possibility of a deferral of the Fed’s next decrement in MBS
purchases is a risk to our view.
The Basel committee softened its leverage ratio proposal from last year this week.
These changes reduce the SLR denominator and would be incrementally positive for
bank MBS demand if US regulators follow with similar rules. However, they are not a
game changer because SLR is only one factor in a multi-dimensional investment
decision process for banks.
We explore valuations in Agency CMOs across the curve and compare them with
pass-throughs and CMBS AAA. In short-duration CMOs, we find value in bonds backed
by HARP-eligible collateral compared to jumbo collateral, and substantially tighter
valuations on PACs compared to busted PACs. Intermediate PACs offer significant
yield, OAS and total return pick-up compared to shorter cashflows, and have positive
returns when hedged with pass-throughs. Longer duration bonds are trading at attractive
valuations, but are likely to remain cheap until investors gain more comfort with rates.
Trade recommendations
Hold short MBS basis (sell $75MM FN 3.5, receive on $30MM 5-yr and $43.8MM 10-yr
swap) at a loss of 13 ticks (3 December 2013, MBS Trade Note).
Took partial profits on buy IOS 4.5 2010 versus 10-yr swap (buy $25MM IOS 4.5
2010 hedged with 10-yr swap using a 66% hedge ratio). Closed half the trade at a profit
of 30+ ticks with carry (15 January 2013, MBS Trade Note).
Hold sell G2/FN 3.5 swap ($50MM), based on rich valuations relative to a deteriorating
supply/demand outlook (21 November 2013, MBS Trade Note). This trade is down
4 ticks since initiation.
Hold buy FN 4 fly ($50MM), based on cheap valuations (2 January 2014, MBS Trade
Note). This trade is up 5 ticks since initiation.
Exhibit 1: Current trade recommendations
Actual P&L of open trades should be slightly lower as this does not reflect bid/offer spread
Trade Idea Start Date P&L
P&L
(ticks)
Short MBS basis (Sell $75MM FN 3.5, receive on $30MM 5-
yr and $43.8MM 10-yr swap)21-Aug-13 (305,086) (13)
Sell G2/FN 3.5 swap ($100MM) 21-Nov-13 (128,906) (4)
Long FN 4.0 fly ($50MM) 2-Jan-14 74,218 5
Total P&L of open trades (359,774)
Total P&L of trades closed YTD 358,125
Note: Pricing date: Jan 14, 2014.
Source: Credit Suisse
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses
Mahesh Swaminathan
+1 212 325 8789
Qumber Hassan
+1 212 538 4988
Vikram Rao
+1 212 325 0709
16 January 2014
Global Securitized Products Weekly 4
Weak NFP potentially a fluke, Vol decline has helped MBS, but could reverse, stick with basis underweight
We maintain an underweight stance on the MBS basis. Our reasons (rich valuations, low
carry, and more downside than upside) remain in place. The sharp drop in last Friday’s
NFP is inconsistent with all other economic data, suggesting that it may have been
either a statistical fluke or simply erroneous. We place a high probability that it will be
revised away next month. Such an outcome could catalyze a meaningful sell-off/spread
widening, in our view.
Exploring drivers of recent MBS performance, we find that the first leg of post FOMC
tightening was an outright narrowing of OAS (Exhibit 2), which was potentially driven by a
continued high Fed takeout (Exhibit 3). More recently, a sharp drop in volatility has likely
been an additional catalyst (Exhibit 4).
This decline in volatility has arguably encouraged investors to infer a narrow trading
range in spreads. However, this could reverse sharply if rate volatility picks up,
potentially heading into FOMC at month end. Therefore, risk/reward in MBS longs
remains weak, in our view.
The risk to our view is a scenario in which the FOMC defers additional reductions at the
January meeting to await actual post-taper implementation economic data (please see last
week’s publication for a detailed discussion). The impact of such a step could be a another
leg of rally/tightening given the near consensus view among market participants
(supported by comments by several Fed officials) that the FOMC will announce the next
decrement this month. Although we share the consensus view as the base case, we place
a roughly 20% probability of the risk scenario being realized.
Exhibit 2: The initial outperformance following December FOMC was an outright OAS tightening
30 Oct 13 30 Nov 13 30 Dec 13
-0-240
-0-160
-0-080
0-000
0-080
5.0
7.5
10.0
12.5
15.0
17.5
20.0
Perf
orm
ance (
32nds)
Vol (b
p/y
r, R
EV
ER
SE
SC
ALE
)
FN 3.5 hedged perf FN 3.5 LOAS
December
FOMC
Source: Credit Suisse
16 January 2014
Global Securitized Products Weekly 5
Exhibit 3: Expected Fed takeout exceeding 100% during Q1 arguably supported the first leg of the post FOMC tightening
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Fe
d's
ta
ke
ou
t
FN 30
Total MBS
Actual Projection
Source: Credit Suisse
Exhibit 4: The sharp drop in vol in 2014 has further catalyzed MBS performance
30 Oct 13 30 Nov 13 30 Dec 13
-0-240
-0-160
-0-080
0-000
0-080
92.5
95.0
97.5
Pe
rfo
rma
nce
(32
nd
s)
Vo
l (b
p/y
r, R
EV
ER
SE
SC
AL
E)
FN 3.5 hedged perf 3y10y annual bp vol
December
FOMC
Source: Credit Suisse
16 January 2014
Global Securitized Products Weekly 6
Softened Basel leverage ratio framework an incremental positive MBS, but not a game changer
The Basel Committee (BCBS) issued an updated Basel III leverage ratio framework on
12 January 2014 after incorporating comments on the consultative document released in
June 2013.
This newly released BCBS framework softens the originally proposed leverage ratio
requirements by reducing the expansion of the denominator due to off-balance sheet
items. US rules proposed last August suggest that regulators may adjust the calculation of
the SLR denominator based on this BCBS framework, although the overall ratio
requirement is likely to remain higher for US GSIBs. .
These changes are incrementally positive for bank MBS demand because they diminish
the pressure on banks to scale back their balance sheet. However, they are not a game
changer because SLR is only one factor (often not the gating factor) in the multi-
dimensional investment decision process for banks. Other important factors include OCI
volatility, risk weighted capital ratios and LCR requirements. At the margin, this softening
of leverage ratio requirements (assuming US regulators follow BCBS) should diminish the
potentially heavy bias in favor loans over MBS that we cited in our 2014 Outlook.
Key changes to the BCBS framework and impact:
1) Limited netting of repos and reverse repos: The final standard allows netting of
repos in calculating with the same counterparty when specific conditions are met. This
brings it in line with US SLR, which allows netting of repos for same
counterparty/same collateral/same maturity transactions.
This change is most beneficial for non-US banks, but only benefits US GSIBs to the
extent that it removes the overhang of adverse treatment under international rules.
Please see notes from the September 2013 meeting of the Federal Advisory Council
and Board of Governors for a detailed discussion of this issue.
We note that some market participants have inaccurately assumed that US SLR does
not offer netting and pointed to this as a threat to MBS repo availability (and attendant
negative consequences to REIT MBS demand). We have never subscribed to this
thesis, but the latest BCBS change may cause a revision of such views.
2) Use credit conversion factors from Basel Standardized Approach for credit risk
instead of a fixed 100% multiplier to convert off balance sheet exposure to on balance
sheet equivalent.
This should help reduce the denominator broadly, but especially favor lower risk
weight exposures.
3) Cash variation margin associated with derivative exposures may be used to
reduce the exposure measure for leverage ratio. This should incrementally reduce
the denominator for SLR.
4) A clearing member's trade exposures to qualifying central counterparties
(QCCPs) associated with client-cleared derivatives transactions may be
excluded when the former does not guarantee the latter’s performance. This should
help reduce the balance sheet impact of such transactions.
16 January 2014
Global Securitized Products Weekly 7
Relative value in CMOs across the curve We explore valuations in Agency CMOs across the curve and compare them with pass-
throughs and CMBS AAA. In short duration CMOs, we find value in bonds backed by
HARP-eligible collateral compared to jumbo collateral, and substantially tighter valuations
on PACs compared to busted PACs. In comparison to short duration CMOs, higher
coupon 30-year passthroughs look attractive and 15-years passthroughs look fair to rich.
Intermediate PACs offer significant yield, OAS and total return pick-up compared to
shorter cashflows, and have positive returns when hedged with pass-throughs. We
recommend intermediate PACs for investors willing to moderately extend out the curve.
Longer duration bonds are trading at attractive valuations, but are likely to remain cheap
until investors gain more comfort with rates.
Short duration CMOs off HARP-eligible collateral looks attractive
In short-duration conventional CMOs, we recommend buying bonds backed by HARP-
eligible collateral due to attractive valuations and significant burnout in HARP speeds over
the last few months. These bonds offer attractive yield, OAS and total return compared to
other short duration CMOs, and the total return profile remains attractive in +50bp/-50bp
rate scenarios (Exhibits 5, 6 and 7). We believe that short-duration bonds off HARP-
eligible collateral are especially attractive compared to those backed by jumbo collateral
which have a worse convexity profile.
In short-duration Ginnie CMOs, there is a significant spread differential between PACs and
busted PACs/sequentials (for similar collateral). Investors are paying up for the extension
protection offered by a PAC structure given the selloff bias in the market, in our view. For
investors with a range-bound view on rates, we recommend buying short duration busted
PACs/sequentials over PAC structures.
Higher coupon 30-year TBA look attractive compared to short duration CMOs
In comparison to short duration CMOs, higher coupon 30-year passthroughs look cheap.
For example, FN 5.5s offer significant yield and OAS pick-up compared to similar duration
CMOs. We note that FN 5.5s are relatively unaffected by an extension of the HARP cutoff
date and have experienced significant burnout in speeds over the last few months. In
contrast to 30-years, similar duration 15-year passthroughs look fair to rich compared to
short duration CMOs.
Intermediate PACs offer attractive yield, OAS and total return pick-up
We recommend buying intermediate PACs for investors looking to go further out the curve.
We believe that these bonds offer meaningful yield and spread pick-up compared to
shorter cashflows, in addition to attractive total returns. Furthermore, projected returns
remain positive even after after hedging out duration with TBA. For example, the 4/Gold 4
PAC bond in Exhibit 5 has a base case total return of 4.4% and a 9 year OAD. If this bond
is hedged at 125% versus FN 3.5s, the 12-month hedged return is marginally positive
(4.4% - 3.2%*125% = 0.4%).
Longer duration CMOs offer attractive valuations, but likely to remain cheap in the
short term
Longer duration CMOs offer significant yield, spread total return pick-up. In particular, the
Z bond in Exhibit 5 (with roughly 20 OAD) has an 8.9% 12-month return in the base case.
However, the key risk in these bonds is a sharp selloff, which can erode returns
significantly. These longer cashflows are likely to remain cheap while investors are
concerned about a selloff, and can tighten subsequently.
We note that compared to new issue CMBS AAA, similar average life CMOs are trading at
only marginally lower yields. For example, the 11.5 average life VADM (4s off CQ 4s) only
concedes roughly 10bp of yield to its new issue CMBS counterpart (10-year average life).
Adjusting for the slightly longer average life of this VADM, the effective yield concession is
roughly 30bp. Given the GSE guarantee, Agency CMOs potentially offer an attractive
alternative at current valuations, in our view.
16 January 2014
Global Securitized Products Weekly 8
Exhibit 5: Relative value in CMOs compared to passthroughs
Valuations as of 1/13/2014 close; +50bp/-50bp scenarios based on gradual rate shock
Sector Security WALA Avg Life Yield
1-yr CPR
(projected) OAS OAD
-50bp base +50bp
Short Ginnie 3/G2SF 5, BPAC 44 2.4 1.4 15 5 2.4 2.2 1.5 0.8
3.5/G2SF 5, PAC 32 3.9 1.9 17 (26) 4.4 3.8 2.2 0.4
Short conventional 3.5/CK 4, BPAC 28 2.7 1.8 14 3 1.9 2.0 2.8 -0.5
4.5/Gold 5, BPAC 98 3.8 2.4 21 13 3.2 4.9 4.1 2.4
Intermediate 4/Gold 4, PAC 40 8.9 3.4 9 39 9.0 8.4 4.4 0.2
LCF 4/4, BPAC 26 20.0 4.1 10 47 14.2 11.2 4.4 -2.2
3/LLB Gold 4.5, BPAC 40 20.6 4.1 10 50 15.2 11.9 4.5 -2.6
VADM 4/CQ 4, VADM 9 11.5 3.7 6 37 10.2 9.0 4.4 -0.3
Z 3.5/G2 3.5, Z 13 18.5 4.4 5 37 20.6 18.8 8.9 -0.7
30-yr TBA FNCL 3.5 9 9.0 3.4 6 18 7.2 6.2 3.2 0.0
FNCL 4 5 7.8 3.3 7 10 6.2 5.4 3.1 0.4
FNCL 4.5 31 6.3 3.2 20 11 4.5 4.1 2.6 0.7
FNCL 5 66 4.7 2.8 24 18 3.5 3.4 2.4 1.0
FNCL 5.5 72 3.9 2.6 28 30 2.8 3.0 2.3 1.2
15-yr TBA FNCI 3 3 5.6 2.4 7 (16) 4.7 4.3 2.6 0.7
FNCI 3.5 10 4.7 2.3 13 (19) 3.9 3.5 2.3 0.8
FNCI 4 47 3.7 2.1 18 9 3.2 3.2 2.2 1.0
Constant Forward
TRR (%)
(12-mo horizon)
Source: Credit Suisse
Exhibit 6: Yield/average life comparison in CMOs, passthroughs and CMBS
Valuations as of 1/13/2014 close
BPAC
SEQBPAC
BPAC
PAC
LCF
LCF
VADM
Z
FN3.5 FN4
FN4.5
FN5FN5.5
DW3
DW3.5DW4
CMBS AAA 30%CE
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
- 5.0 10.0 15.0 20.0 25.0
Yie
ld (
%)
WAL
Source: Credit Suisse
16 January 2014
Global Securitized Products Weekly 9
Exhibit 7: OAS/OAD comparison in CMOs and passthroughs
Valuations as of 1/13/2014 close
BPAC
PAC
BPAC
BPAC
PAC LCF
LCF
VADM Z
FN3.5
FN4 FN4.5
FN5
FN5.5
DW3
DW3.5
DW4
(40)
(30)
(20)
(10)
-
10
20
30
40
50
60
- 5.0 10.0 15.0 20.0 25.0
OA
S (
bp
)
OAD
Source: Credit Suisse
16 January 2014
Global Securitized Products Weekly 10
Non-Agency MBS Speeding up: post-reset Alt-A ARMs and an expanding credit box
For the last few years, the defining, and at times lone, driver of prepayment speeds in
the non-agency space has been equity position. While that remains the major driver of
prepayment speeds, in our view, the sustained rate selloff of the last six months
provides an opportunity to see which collateral might withstand higher mortgage rates.
However, another variable remains an important piece of the puzzle: a potentially
expanding credit box.
Using data provided by current mortgage issuance, we believe the credit box is slowly
beginning to open. We see this effect most amplified in post-reset Alt-A ARMs, where
always current speeds doubled in the second half of 2013, controlling for IO status
(Exhibit 8). Given their currently low WAC but comparatively higher margins, we believe
this trend is likely to continue in 2014 and provide support for Alt-A ARMs.
Exhibit 8: Always current post-reset Alt-A ARMs vCPRs have doubled recently
Always current on an OTS basis, three-month averages
2
4
6
8
10
12
vC
PR
Amortizing
IO
Source: Credit Suisse, Loan Performance
Mortgage Credit – Data suggest the box is slightly expanding
To see how much the mortgage credit box is expanding, we turn to the Ellie Mae
Origination Insight Report to look at both loan closings as well as rejected application
characteristics. The data included in the report cover almost 10% of mortgage originations
in the US, as well as breaking out loan type and purpose.
While the credit quality of purchase loans remains fairly steady since the start of 2013,
refinance loans, both FHA and conventional, have seen declines from their lofty peaks. In
conventional loans, we note noticeable declines in FICO to 734 and increases in back-end
DTI to 40. In addition, the average rejected loan has seen a similar change in FICO,
implying that formerly rejected loans are beginning to close. FHA refinances have seen a
similar story, although the DTI has remained fairly constant around 40.
Marc Firestein
+1 212 325 4379
Mahesh Swaminathan
+1 212 325 8789
16 January 2014
Global Securitized Products Weekly 11
Exhibit 9: The average FICO of closed refi applications has dropped 30 points this year …
Exhibit 10: And the back-end DTI has increased in recent months
Conventional refinancing applications only Conventional refinancing applications only
680
700
720
740
760
780
FIC
O
Closed
Denied
30
34
38
42
46
Back-E
nd D
TI
Closed
Denied
Source: Credit Suisse, Ellie Mae Source: Credit Suisse, Ellie Mae
Alt-A ARM prepayment speeds – increases across LTV buckets
In the last six months, we believe a combination of rising rates pulling forward prepays and
the opening credit box has led to faster Alt-A ARM prepay speeds. To properly control the
effect, we have separated IO and amortizing borrowers. Both cohorts have shown
significant increases over the last 12 months; of particular note, 80-100 LTV borrowers
have seen increases of nearly 4 CPR over the last 24 months.
Exhibit 11: vCPRs on post-reset, amortizing Alt-A borrowers has increased across all LTV buckets …
Exhibit 12: With a similar trend in post-reset, IO Alt-A borrowers
Always current on an OTS basis, mark-to-market LTV Always current on an OTS basis, mark-to-market LTV
0
2
4
6
8
10
12
14
16
2012:H1 2012:H2 2013:H1 2013:H2
vC
PR
<=80 LTV
80-100 LTV
>100 LTV
0
2
4
6
8
10
12
2012:H1 2012:H2 2013:H1 2013:H2
vC
PR
<=80 LTV
80-100 LTV
>100 LTV
Source: Credit Suisse, Loan Performance Source: Credit Suisse, Loan Performance
We have seen a modest amount of slowdown in these borrowers in the last two months,
due in part to daycount and the pull-forward effect of the May/June rate increases.
However, we believe this general upward trend is likely to continue as borrowers gain
more and more access to credit. In addition, Alt-A ARM borrowers stand to benefit from
further LTV gains, with a large portion of the always current universe between 80 and
100 LTV.
16 January 2014
Global Securitized Products Weekly 12
Exhibit 13: Over a quarter of post-reset, amortizing Alt-A ARMs are between 80 and 100 LTV …
Exhibit 14: And over a third of post-reset, Alt-A IO borrowers are as well
Mark-to-market LTVs Mark-to-market LTVs
0%
10%
20%
30%
40%
50%
60%
70%
Share
of
Alw
ays C
urr
ent
Borr
ow
ers
<=80 LTV
80-100 LTV
>100 LTV
0%
10%
20%
30%
40%
50%
60%
Share
of
Alw
ays C
urr
ent
Borr
ow
ers
<=80 LTV
80-100 LTV
>100 LTV
Source: Credit Suisse, Loan Performance Source: Credit Suisse, Loan Performance
Given the lower WAC on this cohort, we believe these borrowers are most likely to target
hybrids over fixed mortgages. The rise in Ellie Mae’s ARM share (Exhibit 15) since the
start of 2013 is likely due in large part to rising 30-year rates and a significantly steeper
curve. However, the post-reset Alt-A borrowers could be incrementally driving this as well.
Exhibit 15: The ARM share of closings has nearly tripled since the start of 2013
0
1
2
3
4
5
6
7
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13
AR
M S
hare
Source: Credit Suisse, Ellie Mae
In turn, we believe that Alt-A post-reset ARM borrowers provide potential prepayment
upside, even in the face of higher rates. Furthermore, their generally deeper discount
pricing makes this incremental upside of even further value.
16 January 2014
Global Securitized Products Weekly 13
CMBS
Market activity and relative value Notes from the CREFC conference Market activity slowed to a near halt over the past two days, with many members of the
CMBS community attending the semi-annual CREFC conference. Despite the lull in
trading activity, the market continued to rally over the past week. The positive sentiment at
this week’s conference helps explain the rally since the start of the year (and probably vice
versa too).
We discussed the start of the year rally, last week, which continued in the few final few
days leading up to the conference. Wider trading legacy AMs are in approximately 20 bp,
over the last week. New issue triple-Bs also tightened. We noted in last week’s edition that
this tranche off of the new issue COMM 2014-CR14 was likely to tighten from the initial
price talk of S+385 bp. The bond wound up pricing at S+360 bp and is in another 10 bp
since then.
There has been net CMBS buying, by investors, every day since the Fed’s tapering
announcement four weeks ago (19 trading days), according to TRACE data. While
volumes were low some days, due to holidays and the conference, the direction has been
consistent. Investors have added a net of $2.1 billion over this time period.
Turning back to the conference, we thought the overall tone was fairly optimistic.
While there were definitely some concerns that were highlighted and frequently discussed,
our sense was that the market consensus remains reasonably bullish, and far from
complacent, at least over the near term. This sentiment came from the overall conference
conversations but was reinforced by both the large turnout as well as the pure number of
meeting requests that we and other attendees were receiving. We highlight some of the
more prevalent themes.
Traditional CMBS investors are growing their allocation and their mix of assets
The record high attendance likely sparked one of the several often-raised questions: “are
the number of investors in the sector expanding?”. Our sense is that there are a few new
investors to the CMBS space but their participation is relatively minor compared to the
expansion of interest of the existing buyer base.
Traditional CMBS buyers seem to be expanding not only their allocation to the sector but
also the type of CMBS investments they are willing to look at. We believe that, so far, this
expansion has been a far bigger drive of demand than new entrants to the market. Most of
the expansion is centered on trying to increase yield. This includes moving further down
the credit stack in securitizations as well as a heightened interest in the mezzanine loan
market, expressed by a variety of investors and investor types.
While such demand may prove fleeting, to the extent it can be maintained, it should help
absorb the increase in supply that is expected (we are forecasting new issuance to be
$110 to $115 billion in 2014). It is also, at least near term, a positive for spreads.
Demand and supply of leverage is increasing
It also appears that there is an increased appetite for, and availability of, leverage for
CMBS. In our outlook we discussed how leverage was likely to be increasingly applied.
The ability to leverage 10-year new issue bonds drove spreads to all-time tights several
years ago.
While we are not forecasting spreads will return to those lows, we believe a little additional
leverage could go a long way in increasing demand. The yield curve has steepened quite
a bit over the past year and with the short end remaining low, funding costs are likely to
remain attractive.
Roger Lehman
+1 212 325 2123
Sylvain Jousseaume, CFA
+1 212 325 1356
Serif Ustun, CFA
+1 212 538 4582
16 January 2014
Global Securitized Products Weekly 14
In particular, the ability to leverage new issue triple-As will help investors increase their
yield as well as create additional demand for the increased supply, in our view. This and
the relative cheapness of CMBS, to corporate bonds, were two reasons we thought new
issue super-seniors could tighten slightly from levels at the end of last year.
The deterioration of credit quality is a concern
There seemed to be little disagreement in the view that the credit quality of deals has
slipped over the past year, and is likely to slip further, over the course of 2014. There was
a little less consensus on the impact this would have.
One popular – albeit imprecise – measure discussed is to equate today’s underwriting
standards to that of a specific legacy cohort. We did this, in more detail, in our Outlook and
then proceeded to overlay the projected losses of those seasoned deals onto today’s
subordination levels. The opinion of many, who we spoke to, pegged current underwriting
similar to that of 2005, or maybe early-2006. We did speak to some who argued that we
had not gotten near those level yet, while others were mindful of the use of IOs,
subordinated debt and pro forma loans and believed standards were worse than seen in
those years. While the use of pro forma underwriting has crept back in, it has not gotten
anywhere near the levels that prevailed in later legacy vintages.
Our own concerns about underwriting quality led us to be cautious on the triple-B minus
sector at the end of last year. On an absolute basis and over the short term, that concern
has been misplaced. However, we believe that over the longer-term, there remains better
relative value in the middle of the capital stack or in slightly more seasoned deals.
More origination and more originators indicate that this trend is likely to continue
The deterioration in quality seems likely to continue over the coming deals as the
competition to originate grows. Conversations indicated that as many as 30 to
35 originators were now actively making loans to securitize. Moody’s estimate of LTVs is
expected to be more than 105.0 percent on deals coming in the first quarter, compared to
103.5 percent in the prior period, according to a Bloomberg news article.
While higher leverage and more risky loans seem inevitable, the question remains whether
subordination levels will be adjusted upward and / or if spreads will rise to compensate for
the potential increase in risk.
In addition, we heard indications that average conduit deal sizes will not increase. The
thought is that originators, especially the smaller and newer entrants, will want to keep the
securitization velocity up and warehouse time down. If this proves to be the case, it will
potentially give investors more deals to go through, making it even more difficult to
properly assess the credit. As a point of reference, last year there were 45 conduit deals
brought to market (totaling $53 billion). In 2007 there were 58 deals (totaling $189 billion).
We believe conduit issuance could potentially hit $80 billion (a 51% rise). While we still
believe that average deal size will increase it may not increase proportionately.
Greater tiering should be the result of changes in quality
The result of declining credit quality should be greater tiering between vintages and
between deals. We have periodically delved into our view of the increasing risks of newer
origination (on average) and continue to believe that there should be a greater spread,
down the conduit credit, between cohorts.
There should also be further distinctions between deals. On recent origination those
quality distinctions are more difficult to make, but these should become more apparent
over time.
Lastly, given the increase in the number of originators, we believe it very likely that this
inter-deal differentiation will only become more important.
16 January 2014
Global Securitized Products Weekly 15
New CMBX indices may help drive the distinctions
The introduction of CMBX.7 was also a very popular topic throughout our various
discussions. The credit quality differential between 2012 and 2013 deals will carry through
to this and will, in part, influence the basis between these two indices. The basis, of
course, will trade differently at each level of the capital stack.
The differential will not only be driven by fundamental value but will likely be heavily
influenced by technical factors, especially in the early stages of trading, as originators may
be more inclined to use the newest index to hedge their pipeline.
More concerned about volatility than rates
When rates started to rise in the middle of last year, the market appeared very concerned
about the impact of higher rates on lending, cap rates and property prices. Since then, the
focus has seemingly, and we believe rightfully, shifted. The market is now more focused on
the volatility of rates rather than the level. In Exhibit 16, we show the updated relationship
between CMBX spreads and interest rate volatility as reflected by the CIRVE index.
Exhibit 16: CMBX.3 AAA and interest rate volatility (CIRVE)
60
80
100
120
140
160
180
40
50
60
70
80
90
100
110
120
Ma
y-1
3
Jun
-13
Jul-
13
Aug-1
3
Se
p-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan
-14
CIRVE (left)
CMBX.3 AAA (right)
Source: Credit Suisse, Markit
Volatility is currently relatively low by recent measures. It is not apparent to us what the
catalyst may be, that could send volatility higher, but we do believe the performance of
CMBS will suffer if there is a spike in volatility, such as we have seen at various periods
over the past several years.
The health of the retail sector was another concern
An ongoing concern for the CMBS market is the heavy exposure to retail and especially to
some specific names, such as JC Penney. The company today announced they were
closing 33 stores across the country. We discuss the exposure below.
As we have discussed previously, we believe store closures by some retailers are very likely
over the coming quarters and years and these will have certain repercussions in the CMBS
market. While a large scale closure is possible, these chains may instead continue to trim,
incrementally, over time, with today’s JCP announcement being an example of that.
Any closures, if they do occur, would probably be concentrated on the
underperforming stores with lower sales figures, in our opinion. This is likely to be
highly correlated with stores situated in lower-quality malls and less well located
retail centers, which we already have the greatest credit concerns about, from a loan
performance point of view.
16 January 2014
Global Securitized Products Weekly 16
To the extent these weaker retailers decide to close stores in higher-quality and
better-located retail centers, the risk to the underlying loan is far less, in our view.
The CW Auction results should come soon
There was also significant interest and discussion on the results of CWCapital’s liquidation
of distressed CMBS assets. The bids were due last December and, so far, there has been
very little information disseminated. However, we would anticipate that more information
will be coming soon.
A story in Commercial Real Estate Direct states that CBRE will “soon start closing sales
with as many as 10 investor groups”. Depending on the speed of these closings, we may
see some of the liquidations flow through in the next remittance period. Even before that,
however, we should start to hear about some of the successful buyers and, more
importantly, the purchase price.
Back in October, when the transaction was first announced, we took a close look at the
original triple-A stack from the GSMS 2007-GG10 transaction, which had fairly large
exposure. We concluded that the GG10 AMs and A1A looked relatively attractive and saw
the potential for the AJs to trade higher as well, post liquidation. This was based in part on
our outlook for the auction to go better than the expected.
Exposure and reaction to JCP store closings
Various Deals
JC Penney (JCP) announced, on Wednesday, that it was closing 33 stores as part of its
turnaround effort. It categorized these are underperforming stores. We believe that 10 of
these locations have either direct or indirect exposure to CMBS. We show this exposure in
Exhibit 17, ordered by deal. None of the deals had exposure to CMBX.6.
We have excluded from this list the Saks – Stratford Square loan in COMM 2000-C1.
While JCP is in the same mall as the Saks store, backing the loan, this is a credit tenant
lease loan and has no credit exposure to the closing JCP store.
Exhibit 17: JC Penney CMBS exposure for announced store closings *
Center Name Deal CMBX City, State
Loan bal
($mn)
Loan (% of deal)
JCP (% of loan)
JCP-weighted exp (%)
JCP lease
exp date
MR DSCR (NCF)
MR Occ.
SpcSrv Transfer
date Other Major Tenants
Bristol Mall BACM 2006-5 2 Bristol, VA 17.3 0.9% 17.7% 0.2% Aug 2017 1.04x 88 na Sears. Belk
Hickory Point Mall BSCMS 2006-PW11 Forsyth, IL 29.0 1.9% 12.2% 0.2% Oct 2015 1.00x 92 na Bergner’s, Sears
Laurel Mall BSCMS 2007-PW15 3 Hazleton, PA 36.8 1.7% 8.9% 0.2% Oct 2014 n/a n/a May 2012 Boscov’s, Sears
Marketplace of Warsaw CGCMT 2004-C2 Warsaw, IN 6.4 0.9% 12.2% 0.1% Feb 2017 n/a n/a na Elder Beernan, Dunham’s
Natchez Mall CGCMT 2006-C4 2 Natchez, MS 7.9 0.5% 22.2% 0.1% May 2014 n/a n/a na Belk
Military Circle Mall GMACC 2004-C2 Norfolk, VA 52.9 9.8% - 0.0% - 1.05x 67 Aug 2013 Hecht’s, Sears (closed)
Lincoln Plaza GSMS 2006-GG6 Rhinelander, WI 1.8 0.1% 51.0% 0.0% Mar 2017 1.39x 100 na Dollar Tree, Payless Shoe
Centre At Salisbury JPMCC 2006-LDP7 2 Salisbury, MD 115.0 3.7% 11.7% 0.4% Jul 2015 1.31x 97 na Macy’s, Boscov’s
Wayne Town Plaza MSC 2007-IQ15 4&5 Wooster, OH 9.6 0.6% 23.3% 0.2% Mar 2014 1.28x 100 na Elder Beernan,Fashion Bug
Wausau Center WFRBS 2011-C4 Wausau, WI 18.8 1.3% 36.4% 0.5% Aug 2014 1.34x 98 na -
Source: Credit Suisse, Trepp, Bloomberg * We have excluded the Saks – Stratford Sqyare loan in COMM 2000-C1. As a CTL it has no exposure to the closing of the nearby JCP location.
The largest exposed loan on the list, in dollar terms, is the Centre at Salisbury ($115
million and 3.7% of JPMCC 2007-LDP7). This was one of two properties that Rouse
recently purchased from Macerich, toward the end of last year. The loan has a reasonably
high DSCR (1.3x) and occupancy (97%) as of the latest set of financials, dated last
September. However, as we noted in our discussion of the purchase, it appeared the
transaction implied a very high LTV for that property. The inline stores generated sales of
$321 per square foot, in 12 months ending last September.
16 January 2014
Global Securitized Products Weekly 17
The other larger exposure is to the Gallery at Military Circle loan ($52.9 million and 9.8%
of GMACC 2004-C2). The JCP store does not appear to be part of the collateral but the
mall still has indirect exposure to it. In addition, the Sears location at this property closed in
May 2012 (although it is still paying rent) and the loan was sent to the special servicer last
year, as the borrower was seeking a modification.
Only one property has exposure to a recent CMBS transaction, Wausau Center. The
loan was securitized in WFRBS 2011-C4 ($18.8 million and 1.3% of the deal) but,
because it is not one of the top loans, there was not any additional information provided
in the term sheet.
As we discussed in our last JC Penney update (October 3, 2013), store closures seemed
likely and we believed would probably be concentrated on the underperforming stores,
with lower sales figures.
While store closures were expected at some point, we were a little surprised the company
only announced 33 affected locations. Our colleagues in equity research note that these
stores have, on average, a smaller footprint than typical JCP locations (they are 3.0% of
the store base but only 2.5% of the total square footage) and that store size and
productivity may have entered into the firm’s decision.
Our equity analysts go on to that this round is just “scratching the surface of what needs to
be done” but is a step in the right direction (see their January 15, 2014 article for more
information).
While we do not have information on the stores outside of CMBS, we also thought it worth
noting that four of the ten closures that were within CMBS have near-term lease
expirations. We believe that this may have also been a factor in choosing locations to
target. Sears also announced, in October, that it will evaluate closing additional stores and
highlighted they will potentially make their adjustments as leases roll.
The store closing headline caused fluctuations in the CMBX market and demonstrates
how sensitive market participants are to perceived JCP risk (this was one of the topics at
the CREFC conference discussed above as well).
Prior to the announcement, late day Wednesday, CMBX.6 BBB- and BBs were tighter on
the day. Soon after the headline came across, they moved approximately 8 and 11 bp
wider, in fairly quick order. Once the market realized that there was no CMBS exposure in
series 6, the indices rallied most of the way back leaving them, on net, only a few wider on
the day.
Moody’s price index up marginally in November The Moody’s/Real Capital Analytics commercial property price index (Moody’s CPPI)
increased 0.1% in November, on a national basis. Although the index moved higher, in
November, the move was far more modest than the prior five months, each which brought
an increase of 1.2% to 1.8%. However, it is not only the sixth straight rise but, after last
month’s revisions, the index has been up in all but one month since January 20101.
This month, the multifamily sector (up 0.6%) outpaced the core commercial property types
(which were relatively flat). That has been the case for the past two months, a reversal of
the June to September period.
The Moody’s CPPI is now up 12.5% through the first 11 months of the year. At the start of
the year, it appeared that price rises were beginning to moderate, but the mid-year rally
negated that view. Unless an unexpected drop occurs in December, the 2013 move is
poised to surpass the annual gains of the prior three years of 8.1%, 12.4% and 9.5% in
2012, 2011 and 2010, respectively.
1 The national index has been slightly restated this month, reversing a monthly drop reported for January 2013 in the previous
editions.
16 January 2014
Global Securitized Products Weekly 18
Since reaching its cyclical low, US CRE prices are now up 50%, retracing nearly three-
quarters (74%) of its decline from the peak in December 2007. We show the Moody’s
CPPI in Exhibit 18 and the three month percentage change in Exhibit 19.
Exhibit 18: Moody’s CPPI Index Exhibit 19: Three-month rolling percentage change
80
90
100
110
120
130
140
150
160
170
180
190
No
v-0
1
No
v-0
2
No
v-0
3
No
v-0
4
No
v-0
5
No
v-0
6
Nov-0
7
No
v-0
8
No
v-0
9
No
v-1
0
No
v-1
1
No
v-1
2
No
v-1
3
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Nov-0
1
Nov-0
2
Nov-0
3
Nov-0
4
Nov-0
5
Nov-0
6
Nov-0
7
Nov-0
8
Nov-0
9
Nov-1
0
Nov-1
1
Nov-1
2
Nov-1
3
Source: Credit Suisse, Moody’s Source: Credit Suisse, Moody’s
Performance by property sector
As we noted in our Year Ahead Outlook, we believe real estate investors are likely to
migrate away from seeking returns through cap rate compression and more toward
fundamental performance, income growth and operational improvements. This indicates
to us that sectors that have lagged in the upswing may start to catch up.
We show Moody’s CPPI performance, by property type, over various time frames in
Exhibit 20. Mimicking October’s results, the only sector that is down on the month is the
Office-CBD subsector, which fell 1.0%. However the two month decline follows a near
5% rise in September. The drop in this sub-index was large enough to negate the small
rises in the other core commercial sectors, the largest of which was in the industrial sub-
index (0.6%). Industrial properties have been the laggard over the year with the index up
just 5.7%, compared to double-digit increases for the other sectors. The star performer
over has been the retail area where prices are up nearly 21%, year-to-date, according to
the index.
Exhibit 20: Index performance by property type (percentage change)
1 month 3 month YTD 12 month
Peak to trough
Peak to Nov-13
Trough to Nov-13
Apartment 0.6 1.6 10.7 11.9 -40.4 0.0 67.8
Retail 0.3 4.5 20.9 22.9 -42.5 -17.5 43.3
Industrial 0.6 4.0 5.7 5.8 -33.2 -21.8 17.2
Office - CBD -1.0 3.7 12.0 11.2 -49.2 -2.0 92.9
Office -Suburban 0.3 2.5 12.3 12.8 -44.9 -27.6 31.4
All Property 0.1 3.1 12.5 13.1 -40.4 -10.6 49.9
Source: Credit Suisse, Moody’s
Since reaching their local troughs, individual sub-indices have performed very differently.
As Exhibit 21 shows, the best performers, since the local lows, have been in the apartment
and CBD office sectors.
16 January 2014
Global Securitized Products Weekly 19
Exhibit 21: Property sub-indices over time
70
90
110
130
150
170
190
210
No
v-0
1
Ma
y-0
2
No
v-0
2
Ma
y-0
3
No
v-0
3
Ma
y-0
4
No
v-0
4
May-0
5
No
v-0
5
Ma
y-0
6
No
v-0
6
Ma
y-0
7
No
v-0
7
May-0
8
No
v-0
8
Ma
y-0
9
No
v-0
9
Ma
y-1
0
No
v-1
0
May-1
1
No
v-1
1
Ma
y-1
2
No
v-1
2
Ma
y-1
3
No
v-1
3
Retail
Industrial
Office - CBD
Office - Suburban
Apartment
Hotels (qtrly)
Source: Credit Suisse, Moody’s
Some of the sectors that reversed the quickest have seen more moderate price growth
recently, as they approach their pre-crisis levels. The apartment sector provides an
example of this.
The apartment sector was up 0.6% in in November as it moves even higher above its pre-
crisis peak. Nevertheless, over the past three months it is up 1.6%, far less than all of the
core sectors (up 2.5% to 4.5%). We may be seeing a similar story emerge with CBD-office
which has dropped for two consecutive months. This is the only other index that is near its
pre-crisis peak and currently sits 2% below that level.
The reverse holds for the property sectors that are further away from their respective
peaks. As noted above, retail has been the best performing sector this year, rising 20%.
As the exhibit shows, it lagged the recovery in the other sectors prior to 2013.
Major versus non-major markets
The Moody’s indices divide properties geographically into major and non-major markets.
The major markets include what used to be called the “six city trophy” markets of Boston,
Chicago, Los Angeles, New York, San Francisco and Washington DC.
Similar to the reversal on property type
level, we are seeing some shift in the
leadership between major and non-major
markets. Exhibit 22 shows the significant
divergence between the performance of
the major and non-major markets.
The recovery of the major market segment
outpaced that of the non-major markets
since the end of 2009 but the pace of
recovery appears to have slowed and
even declined slightly in mid-2012, before
resuming its rise toward the end of 2012.
Since the trough, the major market sector
has improved 63.0% while the non-major
market index is up 39.7%.
Exhibit 22: Major and non-major markets
80
100
120
140
160
180
200
220
No
v-0
1
No
v-0
2
No
v-0
3
No
v-0
4
No
v-0
5
No
v-0
6
No
v-0
7
Nov-0
8
No
v-0
9
No
v-1
0
No
v-1
1
No
v-1
2
Nov-1
3
Major markets
National
Non-majormarkets
Source: Credit Suisse, Moody’s
16 January 2014
Global Securitized Products Weekly 20
In November, the major market sub-index was up 0.8% while prices in non-major markets
were down 0.4%. Year-to-date, we have seen a comparatively similar performance
between these two sectors with non-major markets having a very slight edge (up 12.6%
compared to 12.4%). We believe the performance of the non-major market index is, at
least in part, attributable to the changing proportion of distressed property transactions
included in the index.
Proportions of distressed transactions matter
We believe part of the reason for the difference in performance between the various
sectors lies in the proportion of distressed transactions. A higher proportion of distressed
transactions will lower repeat sales indices, such as these, even if there is absolutely no
price change in a given months, while a lower proportion of distressed trades will help to
inflate such indices.
Moody’s does not generally provide detailed data on the proportion of distressed
transactions but does show a chart with the percentage of the total. It is clear from this that
the vast majority of the decline in distressed transactions, over the past year, is in the non-
major markets. By contrast, the proportion of distressed transactions in major markets is
not only lower but has also been more consistent. We believe this disparity explains part of
the recent non-major market’s relative improvement.
Special topic on market and property size
On occasion Moody’s will focus on a special topic from the data. This month, they looked
at the impact of office property size and market size on performance from the most recent
trough levels. Some of their findings included:
Manhattan, the biggest US office market, was the best performer. The market has more
than doubled in price since the trough.
Manhattan slightly outpaced the major market CBD office index which is up 97% since
the trough. This includes both large properties and large markets.
Within the suburban CBD office market, the larger properties outpaced the recovery of
smaller properties. This held in major markets and was especially pronounced in the
non-major markets.
Moody’s also found that the recovery of the medical office sector has lagged the overall
office recovery and is up only 20% from the trough, compared to the national office
recovery of 60%.
Preliminary Q4 2013 CRE fundamentals Commercial real estate markets have, in general, been recovering since the bottom of the
cycle; however, the extent of recovery across the various property sectors remains uneven.
This is not only due to the different dynamics of each sector but also to the varying lags to
the economic cycle. We saw this when we looked the price performance of commercial
real estate, in the preceding section. The same holds when we look at the path of real
estate fundamentals..
The multifamily and hotel sectors have posted strong increases, in both occupancy
rates and rent growth, for four consecutive years, as both have a reasonably short
lag to changes in the economic climate (Exhibit 23). In contrast, the pace of recovery
for the office and retail sectors has been quite slow as occupancy and rental rates have
only improved slightly, reflecting the slow US economic growth environment.
16 January 2014
Global Securitized Products Weekly 21
Exhibit 23: Year-over-year changes in rents and vacancy rates
Effective Rents (%)* Vacancy Rate (bps)
Year Multifamily Hotel Office Retail Year Multifamily Hotel Office Retail
2009 -2.9% -16.7% -8.9% -3.7% 2009 130 520 250 170
2010 2.3% 5.1% -1.5% -1.4% 2010 -140 -240 60 40
2011 2.4% 8.2% 2.0% -0.1% 2011 -140 -260 -20 0
2012 3.9% 6.4% 2.0% 0.5% 2012 -60 -120 -30 -30
2013 3.2% 5.7% 2.2% 1.5% 2013 -50 -110 -20 -30
* Change in RevPAR for the hotel sector Source: Credit Suisse, REIS, STR
One of the factors we thought would be a big positive for commercial real estate’s
recovery was the lack of new construction, which has kept the overall supply low. The
reduction in new space, coming online, has been a universal positive, so far, across all
property types.
In the next few sections, we review the trends across the major property types based on
the preliminary 4Q 2013 data released by REIS, CoStar, and Smith Travel Research, and
compare conduit CMBS performance for each property sector.
Multifamily Multifamily sector fundamentals continued to show improvement in the fourth quarter. The
multifamily sector, along with hotels, are outperforming the rest of the commercial real
estate market coming out of the recent real estate downturn. Vacancies have been
declining and rents increasing, materially and consistently, since early 2010, albeit to a
varying degree.
The vacancy rate dropped another 10 bp, to 4.1%, in the fourth quarter of 2013. Vacancies
have been declining (or stable) for 16 consecutive quarters now. The pace of improvement
has naturally slowed, as the market got tighter. Vacancies are now in the low single-digits,
the tightest levels since 3Q 2001.
Vacancies fell 50 bp since last year and are down 390 bp since the cyclical peak, in late
2009. Effective rents increased by 0.8% over the quarter, bringing the year-over-year
increase to 3.2% (see Exhibits 24 and 25).
A testament to the market’s strength can be seen in the total net absorption, of 165k
units over the year, We note that 127k new units were completed across the multifamily
markets REIS tracks – the most in the last four years.
Exhibit 24: Multifamily vacancies declined by 10 bp to 4.1% and effective rents increased by 0.8% in the fourth quarter of 2013
Exhibit 25: Multifamily completions reverted back to pre-crisis levels
2%
3%
4%
5%
6%
7%
8%
9%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2007
Q4
2008
Q2
2008
Q4
2009
Q2
2009
Q4
2010
Q2
2010
Q4
2011
Q2
2011
Q4
2012
Q2
2012
Q4
2013
Q2
2013
Q4
Vac R
ate
Chg
in R
ents
QoQ Rent Change MF Vacancies
2%
3%
4%
5%
6%
7%
8%
9%
0k
20k
40k
60k
80k
100k
120k
140k
160k
2007
Q4
2008
Q2
2008
Q4
2009
Q2
2009
Q4
2010
Q2
2010
Q4
2011
Q2
2011
Q4
2012
Q2
2012
Q4
2013
Q2
2013
Q4
Vac R
ate
Com
plet
ions
(uni
ts)
MF Completions (12-mo change)
MF Vacancies
Source: Credit Suisse, REIS Source: Credit Suisse, REIS
16 January 2014
Global Securitized Products Weekly 22
Construction activity is expected to pick up further and REIS expects 165k units to be
delivered this year. To put that in perspective, we note that places construction near the
historical average. This is consistent with Census Bureau Data.
The Census Bureau data shows that permits and starts for 5+ unit buildings have been
trending higher and have more than doubled since the recession ended. Both series are
now near their respective historical averages (Exhibits 26 and 27). That said, we think the
forecasted increase in multifamily supply is manageable, given how undersupplied the
sector has been in recent years, and should not lead to a spike in vacancies.
Exhibit 26: Multifamily building permits … Exhibit 27: … and building starts are back to historical averages
0K
100K
200K
300K
400K
500K
600K
200
1
200
2
2003
200
4
200
5
200
6
200
7
200
8
200
9
2010
201
1
201
2
2013
Building permits (5+units)
12 per. Mov. Avg. (Buildingpermits (5+units))
0K
50K
100K
150K
200K
250K
300K
350K
400K
450K
200
1
200
2
2003
200
4
200
5
200
6
200
7
200
8
200
9
2010
201
1
201
2
2013
Starts (5+units)
12 per. Mov. Avg. (Starts(5+units))
Source: Credit Suisse, US Census Bureau Source: Credit Suisse, REIS
Multifamily markets have been the beneficiary of the ongoing weakness in the single-
family housing market as well as robust funding alternatives from the GSEs. In addition to
the increased difficulty in getting a residential mortgage, lack of any meaningful increase in
incomes, uncertainty about economic growth and housing prices still lead many to favor
renting over buying. Exhibit 28 shows that homeownership continues to decline, and this is
another positive for the multifamily sector. That said, housing prices have shown strong
gains over the past year and this too should also serve to diminish one of the positives
propelling the multifamily market.
Exhibit 28: Multifamily vacancy rates and homeownership
2%
3%
4%
5%
6%
7%
8%
9%
63%
64%
65%
66%
67%
68%
69%
70%
200
7 Q
3
200
7 Q
4
200
8 Q
1
200
8 Q
2
200
8 Q
3
200
8 Q
4
200
9 Q
1
200
9 Q
2
200
9 Q
3
200
9 Q
4
201
0 Q
1
201
0 Q
2
2010
Q3
201
0 Q
4
201
1 Q
1
201
1 Q
2
201
1 Q
3
201
1 Q
4
201
2 Q
1
201
2 Q
2
201
2 Q
3
201
2 Q
4
201
3 Q
1
201
3 Q
2
201
3 Q
3
Homeownership Rate (LHS) Multifamily Vacancy Rate (RHS)
Source: Credit Suisse, REIS, US Census Bureau, the BLOOMBERG PROFESSIONAL™ service
16 January 2014
Global Securitized Products Weekly 23
Improving sector fundamentals are helping CMBS multifamily loans and leading to fewer
new credit problems. The 60+day delinquency rate for the sector dropped from 16.3% in
early 2011, to 11.8% as of last month (Exhibit 29). In addition, our proprietary Mod-CLIR
metric, which accounts for delinquencies, liquidations, and modifications, has been
increasing at the slowest pace since the recession began. This would imply fewer new
credit problems, which is also confirmed by our first-time delinquency series, shown in
Exhibit 30.
Exhibit 29: Multifamily: Delinquency rate is down, CLIR is stable Exhibit 30: Fewer new delinquencies for multifamily
19.0%
11.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
De
c-0
8
Jun
-09
De
c-0
9
Jun
-10
De
c-1
0
Jun
-11
De
c-1
1
Jun
-12
De
c-1
2
Jun
-13
De
c-1
3
Multifamily Mod-CLIR
Multifamily 60+day
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Dec-1
0
Ma
r-1
1
Jun
-11
Se
p-1
1
Dec-1
1
Ma
r-1
2
Jun
-12
Se
p-1
2
Dec-1
2
Ma
r-1
3
Jun
-13
Se
p-1
3
Dec-1
3
Loans becoming 60+dayfor the first time
6-mth moving avg
$bn
Source: Credit Suisse, Trepp Source: Credit Suisse, Trepp
Hotel
Key performance indicators for the hotel sector show a pattern similar to that of the
multifamily sector. Occupancy rates and revenue per available room (RevPAR) metrics
have grown consistently month-over-month (adjusting for seasonality) since early 2010,
but occupancy rates have only seen marginal increases lately. Monthly occupancies were
up 1.1% in Q4 2013 and RevPARs increased at a respectable rate of 5.3%, suggesting
that most of the RevPAR gain is due to higher room prices (Exhibits 31 and 32).
Exhibit 31: Hotel occupancy improved slightly Exhibit 32: However RevPARs continued to increase
40%
45%
50%
55%
60%
65%
70%
75%
Jan
Fe
b
Mar
Ap
r
Ma
y
Jun
Jul
Au
g
Se
p
Oct
Nov
Dec
2013
2012
2011
2010
$40
$45
$50
$55
$60
$65
$70
$75
$80
Jan
Fe
b
Ma
r
Ap
r
Ma
y
Jun
Jul
Au
g
Se
p
Oct
Nov
Dec
2013
2012
2011
2010
Source: Credit Suisse, STR Source: Credit Suisse, STR
16 January 2014
Global Securitized Products Weekly 24
The improved fundamentals have also started to carry over to CMBS performance. The
60+day delinquency rate for hotels peaked at 16.7% in January 2011 and has declined
since. Delinquencies reached 11.3% in December 2013 (Exhibit 33). First-time
delinquencies are also trending down, as shown in Exhibit 34.
With the improved sector fundamentals, we have seen a commensurate rise of securitized
hotel loans in both conduit and single-borrower CMBS deals. On the single-borrower side,
about 50% of single-borrower CMBS issuance last year ($12.6 billion out of $25.7 billion)
has been backed by hotels, including the $3.5 billion Hilton deal, which priced in Q4 2013.
On the conduit side, the proportion of hotel loans in 2013 issuance has risen to 16%,
compared to 13% for the 2012 cohort.
Exhibit 33: Hotel delinquency rate is down, CLIR is stable Exhibit 34: Fewer first-time delinquencies for hotels
20.7%
11.3%
0%
5%
10%
15%
20%
25%
De
c-0
8
Jun-0
9
De
c-0
9
Jun
-10
De
c-1
0
Jun
-11
De
c-1
1
Jun-1
2
De
c-1
2
Jun
-13
De
c-1
3
Hotel Mod-CLIR
Hotel 60+day
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
De
c-1
0
Ma
r-1
1
Jun
-11
Se
p-1
1
De
c-1
1
Ma
r-1
2
Jun
-12
Se
p-1
2
De
c-1
2
Ma
r-1
3
Jun
-13
Se
p-1
3
De
c-1
3
Loans becoming 60+dayfor the first time
6-mth moving avg
$bn
Source: Credit Suisse, Trepp Source: Credit Suisse, Trepp
Office
The lackluster recovery in the office sector continued in the fourth quarter. The national
vacancy rate remained unchanged at 16.9%, bringing the year-over-year change down by
only 20 bp. This shows a continued, but rather gradual, improvement from the cyclical high
of 17.6%, in the fourth quarter of 2010. Vacancy rates remain near levels last experienced
a decade ago and are only about 2% lower than the peak levels of early 1990s.
Effective rents increased by 0.7% on the quarter, bringing the year-over-year increase to
2.2% (Exhibit 35). These statistics bear out our thesis that we should see a moderate
improvement in vacancy rates and rental growth due to increasing demand in a slow
growth economy and a drop in construction activity.
While we believe that all property sectors are impacted by the health of the labor market,
the office market clearly has the closest and most direct ties. The payroll numbers shown
in Exhibit 36 reveal the extent of job losses at the height of the recession, as well as the
tame increases, even as job growth resumed. We reiterate our view that unless
employment prospects meaningfully change in upcoming quarters, office vacancies are
likely to stay at the 16%-17% level for a while.
16 January 2014
Global Securitized Products Weekly 25
Exhibit 35: Office rents continued to increase at a slow pace, vacancies were unchanged …
Exhibit 36: … but more job growth is needed for office vacancies to return pre-crisis levels
8%
10%
12%
14%
16%
18%
20%
$20
$21
$22
$23
$24
$25
$26
200
7 Q
4
200
8 Q
2
200
8 Q
4
200
9 Q
2
200
9 Q
4
201
0 Q
2
201
0 Q
4
201
1 Q
2
201
1 Q
4
201
2 Q
2
201
2 Q
4
201
3 Q
2
201
3 Q
4
Va
c R
ate
Eff
ective
Re
nt
Office Rent $ Office Vacancies
4%
6%
8%
10%
12%
14%
16%
18%
20%
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
200
0 Q
4
2001
Q4
200
2 Q
4
200
3 Q
4
2004
Q4
200
5 Q
4
200
6 Q
4
200
7 Q
4
200
8 Q
4
200
9 Q
4
201
0 Q
4
201
1 Q
4
201
2 Q
4
201
3 Q
4
Chg in Payrolls (x000)
Office Vacancies
Source: Credit Suisse, REIS Source: Credit Suisse, REIS, BLS
Lack of new supply played an important role in this cycle and served to support the office
sector’s performance. New building deliveries reached a record low in 2011 of just 39
million square feet and were only 47 million square feet last year. This compares to an
annual average of 160 million square feet over the past 30 years. Based on the estimates
of buildings under construction, 2014 office deliveries will be up slightly but still relatively
low, at approximately 63 million square feet, according to CoStar (Exhibit 37).
Exhibit 37: Historical office deliveries
169
121
6139 46 47
63
0
50
100
150
200
250
300
350
198
4
198
5
198
6
198
7
198
8
198
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
(million SF)
Estimated future deliveries for 2014 are based on buildings currently under construction. Source: Credit Suisse, CoStar
We see the challenges of the office sector, with slowly improving fundamentals, manifest
themselves in CMBS office loan performance statistics. Office delinquencies have recently
started to trend lower (Exhibit 37) but this started much later (and the improvement has
been much smaller) than trend in the multifamily and hotel sector. Further improvements
seem likely if the pace of the first-time delinquencies continues to slow. Where this had
been around $1 billion a month, it has dropped and more recently averaged $280 million a
month during the last three quarters (Exhibit 38).
16 January 2014
Global Securitized Products Weekly 26
Exhibit 38: Office delinquency rate and Mod-CLIR Exhibit 39: First-time office delinquencies
18.1%
9.9%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Dec-0
8
Jun
-09
Dec-0
9
Jun
-10
Dec-1
0
Jun
-11
Dec-1
1
Jun
-12
Dec-1
2
Jun
-13
Dec-1
3
Office Mod-CLIR
Office 60+day
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
De
c-1
0
Ma
r-1
1
Jun
-11
Se
p-1
1
De
c-1
1
Ma
r-1
2
Jun
-12
Se
p-1
2
De
c-1
2
Ma
r-1
3
Jun
-13
Se
p-1
3
De
c-1
3
Loans becoming 60+dayfor the first time
6-mth moving avg
$bn
Source: Credit Suisse, Trepp Source: Credit Suisse, Trepp
Retail
Retail has lagged the recovery of the other property sectors, making it the worst performer
since the end of the recession. There have been tentative signs that the worst may be
over, with performance metrics for the sector starting to stabilize in 4Q 2011. However, the
progress remains slow.
The vacancy rate for neighborhood and community shopping centers dropped only 10 bps
to 10.4% in the latest quarter. This brings vacancies down by just 30 bp year over year.
Rents increased for the ninth straight quarter, up 0.5%, implying a 1.5% increase year
over year – the smallest across the major CRE sectors (Exhibit 40).
Exhibit 40: Neighborhood and community shopping centers vacancies are declining; rents are stagnant
Exhibit 41: Malls perform better than shopping centers
7%
8%
9%
10%
11%
12%
$14
$15
$16
$17
$18
$19
200
7 Q
4
200
8 Q
2
200
8 Q
4
200
9 Q
2
200
9 Q
4
201
0 Q
2
201
0 Q
4
201
1 Q
2
201
1 Q
4
201
2 Q
2
201
2 Q
4
201
3 Q
2
201
3 Q
4
Shopping Center Rent $
Shopping Center Vacancies
5%
6%
7%
8%
9%
10%
$37
$38
$39
$40
$41
200
8 Q
4
200
9 Q
2
200
9 Q
4
201
0 Q
2
201
0 Q
4
201
1 Q
2
201
1 Q
4
201
2 Q
2
201
2 Q
4
201
3 Q
2
201
3 Q
4
Mall Askin Rent $
Mall Vacancies
Source: Credit Suisse, REIS Source: Credit Suisse, REIS
16 January 2014
Global Securitized Products Weekly 27
On the other hand regional malls continue to follow a better trajectory, with rents
increasing for the eleventh quarter in a row (up 0.5% in fourth quarter and up 1.6% year
over year). Vacancies declined 30 bp to 7.9% in the last quarter bringing year-over-year
decline to 70 bp (Exhibit 41).
On the positive side, the new supply of retail space has remained constrained, which
should help bolster the sector. While this is similar to the office sector, community
shopping centers did not have the same reduction of new supply heading into the
recession. This, in all likelihood, contributed to the slower recovery relative to the
other sectors.
While the improvement in recent quarters is encouraging, we still have concerns for the
retail market. In addition to slow job growth (which also affects consumer spending), we
have seen a continued stream of retailers evaluate their space needs as sales remain
weak and online competition grows. Concerns over this, and specifically about JC Penney,
(whose recent store closure announcement is discussed in another section), also weigh on
the future performance of that space.
CMBS retail loan performance is in line with the slow recovery for the sector. However,
delinquencies have started to come down, with liquidations staying high and first-time
credit problems moderating, over the prior few months (Exhibits 42 and 43).
Exhibit 42: Retail delinquency rate and Mod-CLIR Exhibit 43: Retail first-time delinquencies
13.2%
8.1%
0%
2%
4%
6%
8%
10%
12%
14%
De
c-0
8
Jun
-09
Dec-0
9
Jun
-10
Dec-1
0
Jun
-11
Dec-1
1
Jun
-12
Dec-1
2
Jun
-13
Dec-1
3
Retail Mod-CLIR
Retail 60+day
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0D
ec-1
0
Ma
r-1
1
Jun
-11
Se
p-1
1
De
c-1
1
Ma
r-1
2
Jun
-12
Se
p-1
2
De
c-1
2
Ma
r-1
3
Jun
-13
Se
p-1
3
De
c-1
3
Loans becoming 60+dayfor the first time
6-mth moving avg
$bn
Source: Credit Suisse, Trepp Source: Credit Suisse, Trepp
Loans in the News CS renews 11 Madison lease with Sony taking space too
CSMC 2006-C4
Credit Suisse is planning on renewing its lease, although for a smaller space, at 11
Madison Avenue in New York, its US headquarters, according to various news stories in
the popular press, including Bloomberg and the New York Post. In addition, Sony will take
a large amount of space in the building. The possibility of Sony moving in has been
discussed since last September.
The building backs a $806 million loan securitized in CSMC 2006-C4, where it represents
nearly one quarter of the collateral (23.7%). The loan is not set to mature until September
2016 and does not become open to prepay until four months prior to that date. The loan
was put on the watchlist due to “financial conditions”. The latest reported DSCR, for the
first three quarters of 2013, is 0.9x the net cash flow and the building is 89% occupied.
16 January 2014
Global Securitized Products Weekly 28
Credit Suisse is the building’s largest tenant and currently occupies more than 1.9 million
of the building’s 2.2 million square feet, under a lease that is set to expire in 2017. Under
the lease renewal the company will occupy 1.2 million square feet for 20 years. In addition,
Sony is expected to sign a lease for approximately 520k square feet. That deal should be
finalized next week. Asking rents were in the $70 per square foot range, according to the
news story.
The building has other tenants and also includes retail space. For example, Fidelity
Investor Center recently signed a 15 year deal for 22k square feet.
The building is owned by the Sapir Organization and CIM Group. In September 2012 the
building was put up for sale and the owners had reportedly hoped to get $1.5 billion for the
property. A few months later, the listing was pulled as the owners thought the building would
generate a higher sales price after securing the 2017 lease renewal, with Credit Suisse.
Woodfield Crossing sold from REO near appraised value
CSMC 2007-C5
Neyer Properties has purchased the Woodfield Crossing retail center, located in
Indianapolis, for $26 million, according to the Cincinnati Business Courier. The retail
center total approximately 386k square feet and the buyer is planning on investing $5
million to renovate some of the buildings.
The property is REO and part of the collateral for CSMC 2007-C5 with an associated loan
balance of $41.5 million, or about 2.1% of the deal. The loan was moved to the special
servicer in September 2009, for a second time, and became REO in April 2012.
The sale price is very close to the most recent appraised value of $26.3 million. In addition
to the associated loan balance, there is exposure to accumulated advances and interest of
over $2.5 million as well as an additional $1.8 million of cumulative ASERs.
Given this, and assuming some additional transaction costs, we expect the liquidation to
lead to a loss in the neighborhood of around $21 million, very close to the current ARA of
$20.5 million. A loss of that magnitude would lead to a further down of Class E (originally
rated single-A plus). There will also be a partial shortfall recovery for Class D and a full
recovery for the classes above it (barring any other large changes in other loans in the
deal). The loss may be reported on the January remittance reports which come out later
this week.
Larger loan losses reported in January, so far
BACM 2007-3 and other deals
As we gather data from the January remittance reports, we note that the preliminary
information continues to support many of the themes we discussed, in our Year Ahead
Outlook, regarding the direction of CMBS credit.
While a large number of deals have yet to report for January, we find that, so far, the pace
of new 30-day delinquencies and transfers to special servicing remains low while
liquidations remain robust. We highlight some notable loan losses, reported so far this
month, in Exhibit 44. BACM 2007-3, with over $100 million of losses, stands out but the
there are several other deals that have also seen larger liquidations.
Given the closing of the CWCapital auction, and perhaps others to follow, we expect loan
liquidations to remain an important driver of CMBS credit and value in the coming months.
16 January 2014
Global Securitized Products Weekly 29
Exhibit 44: Notable loan losses in January, so far
Deal CMBX Loan Maturity Date
Cutoff bal ($mn)
Disp bal ($mn) Prop type City State
Loss ($mn)
BACM 2007-3 CMBX4 Metropolis Shopping Center Jul-14 86.0 86.0 Retail Plainfield IN 66.3
BACM 2007-3 CMBX4 Philly Self Storage Portfolio May-17 25.6 24.8 Self Storage Philadelphia PA 23.0
BSCMS 2007-PW16 CMBX4 PGA Design Center Apr-17 30.0 30.0 Retail Palm Beach Gardens FL 32.0
COMM 2005-C6 Tropicana Center Jul-15 56.0 51.3 Retail Las Vegas NV 22.4
GSMS 2005-GG4 Four Falls Mar-10 42.2 40.9 Office Conshohocken PA 0.8
JPMCC 2005-LDP4 CMBX1 Sterling Pointe Shopping Center Aug-15 38.8 37.0 Retail Lincoln CA 9.3
JPMCC 2006-LDP9 CMBX3 Crossroads Center Oct-16 39.5 38.6 Retail Waterloo IA 29.6
JPMCC 2007-C1 CMBX5 Landmark Office Center Nov-17 24.4 22.8 Office Indianapolis IN 17.9
JPMCC 2007-CB20 CMBX4&5 Baldwin Park Retail Oct-17 41.5 39.7 Retail Orlando FL 22.5
JPMCC 2007-CB20 CMBX4&5 International Aluminum Portfolio Jul-17 39.0 28.1 Industrial Various VR 11.2
MLCFC 2006-3 CMBX2 Gilbert Town Square Sep-16 23.8 23.2 Retail Gilbert AZ 13.3
MSC 2006-HQ9 CMBX2 The Center Point Complex Aug-16 31.0 29.5 Retail Highpoint NC 23.8
MSC 2007-IQ14 CMBX4 New York City Apartment - A note Dec-17 135.0 135.0 Multifamily New York NY 0.0
CMBX4 New York City Apartment - B note Dec-17 60.0 60.0 Multifamily New York NY 40.0
Total 672.8 646.7 311.9
Source: Credit Suisse, Trepp, Trustee reports
16 January 2014
Global Securitized Products Weekly 30
Modeling and Analytics Non-Agency RMBS model projections and Collateral Performance (January 2014)
Based on client feedback, we have started this new monthly report to inform Locus
nonagency model users about model performance and valuation impact.
Model valuation update:
We currently use Case-Shiller house price indices to update loan level CLTV. The
quarterly HPI data release at end of December 2013 is reflected in January 2014
model projections. Overall, HPA performances were higher than model assumptions,
especially for certain states, for example, California. As a result, the projected
cumulative defaults and severities are down by around 1% in our base case,
compared with previous model projections. Sectors with high percentage of California
loans are affected more. For example, projected cumulative defaults and severities
are down by around 2.5% and 1.3% respectively for 2004 – 2007 Option ARM
collateral. These lead to higher model yield.
Model and collateral performance (based on the latest CoreLogic loan performance data
as of November 2013):
November ’13 default rates continue to be lower than expected for 2006-2007 Option
ARM. The main driver is slower liquidations. While foreclosure to REO roll rates have
been stable, REO to liquidation roll rates have been slowing down since May 2013
(18.7% in May to 10.8% in November).
Modification rates on 60+ delinquent Subprime loans, serviced by Ocwen, Nationstar
and Chase, are decreasing, but the share of principal forgiveness among all modification
types is increasing, especially for loans serviced by Nationstar, where principal mods
share increased from 27% to 54% over the last three months.
Modification activity stopped on loans formerly serviced by IndyMac after transfer of
IndyMac’s servicing rights to Ocwen. The model assumes that modification rates would
mean-revert after the transition period.
The following pages show more detailed information on vintage/sector level loss projections,
model error tracking, collateral performance, roll rates and servicer level trends.
David Zhang
212 325 2783
Oleg Koriachkin
212 325 0578
Tony Tang
212 325 2804
This is an exact excerpt from the
Modeling and Analytics: Non-
Agency RMBS model projections
and Collateral Performance
(January 2014),
published 14 January 2014
16 January 2014
Global Securitized Products Weekly 31
Loss Projections
Exhibit 45: Projected Cumulative Loss by Deal Issue Year in 10 Years (11/01/2013 as of date)
ProductDeal Issue
YearCurrent Balance Factor *
% of 60+
(OTS)
Realized
Loss
Cum
Default
(base)
Cum
Default
(stress)
Cum
Default
(CS HPA)
Cum
Default
(optimistic)
Cum Loss
(base)
Cum Loss
(stress)
Cum Loss
(CS HPA)
Cum Loss
(optimistic)
2003 $9,749,543,539 5.24% 18.20% 3.07% 22.04% 26.31% 23.40% 19.22% 11.46% 14.54% 12.68% 9.59%
2004 $27,213,900,206 7.94% 22.17% 4.54% 30.80% 35.68% 31.74% 27.13% 16.06% 20.03% 17.19% 13.48%
2005 $61,009,240,790 13.67% 29.71% 12.39% 48.87% 53.98% 49.50% 44.54% 26.83% 32.25% 27.93% 22.99%
2006 $102,853,700,246 23.37% 34.99% 25.98% 58.64% 63.40% 59.13% 54.39% 35.31% 41.16% 36.41% 30.93%
2007 $71,282,407,638 36.72% 34.58% 27.52% 55.97% 60.68% 56.48% 51.76% 32.64% 38.28% 33.75% 28.43%
2008 $1,038,272,259 51.09% 30.51% 20.63% 39.13% 43.04% 39.33% 35.87% 22.53% 26.81% 23.31% 19.48%
2009 $308,720,147 52.69% 32.64% 24.76% 46.01% 50.47% 47.24% 42.34% 27.46% 32.34% 29.05% 23.85%
2010 $754,140,972 43.48% 10.62% 12.82% 31.54% 36.97% 31.20% 27.19% 12.69% 17.00% 12.92% 9.86%
2011 $1,361,252,057 64.97% 15.74% 4.57% 30.17% 34.78% 30.58% 26.47% 18.20% 22.08% 18.98% 15.53%
2012 $3,573,858,394 75.77% 29.84% 4.05% 26.21% 29.70% 27.43% 23.46% 15.20% 18.60% 16.55% 12.85%
2013 $5,665,747,449 83.67% 21.72% 1.51% 25.06% 29.23% 25.52% 21.76% 13.90% 17.55% 14.70% 11.37%
$284,810,783,696 17.51%
ABX indices
ABX0601 $4,644,671,962 14.81% 30.06% 15.80% 53.79% 59.07% 54.40% 49.18% 29.65% 35.54% 30.77% 25.38%
ABX0602 $6,409,172,248 19.60% 34.92% 24.58% 58.85% 63.70% 59.24% 54.54% 35.27% 41.18% 36.29% 30.85%
ABX0701 $8,138,838,569 28.54% 36.81% 27.95% 59.64% 64.29% 60.23% 55.45% 37.51% 43.45% 38.73% 33.01%
ABX0702 $10,297,224,558 35.24% 35.87% 29.73% 59.21% 63.94% 59.64% 54.93% 34.26% 40.10% 35.33% 29.88%
2003 $7,721,404,764 8.95% 9.44% 0.75% 7.26% 8.98% 7.52% 6.27% 3.62% 4.65% 3.88% 3.04%
2004 $24,181,239,199 13.84% 12.13% 2.18% 14.63% 17.68% 14.51% 12.62% 6.89% 8.77% 7.02% 5.75%
2005 $71,311,348,021 25.14% 15.87% 7.61% 23.52% 27.19% 23.32% 20.85% 12.19% 14.91% 12.36% 10.41%
2006 $85,630,643,841 29.10% 23.48% 16.05% 36.36% 40.69% 36.11% 33.00% 20.46% 24.13% 20.73% 17.94%
2007 $76,292,443,973 36.21% 24.58% 17.71% 38.45% 43.05% 37.81% 34.84% 20.73% 24.47% 20.86% 18.17%
2008 $378,607,342 39.41% 16.23% 12.01% 28.31% 32.94% 27.34% 24.85% 12.41% 15.44% 12.40% 10.48%
2009 $1,066,172,532 48.97% 7.46% 6.77% 19.18% 23.79% 20.73% 16.01% 11.44% 14.91% 12.67% 9.21%
2010 $68,441,950 65.88% 8.09% 1.91% 18.87% 23.60% 20.05% 15.44% 8.03% 11.35% 9.18% 5.94%
2012 $121,450,282 92.98% 7.81% 1.25% 31.93% 37.73% 31.96% 27.34% 15.38% 19.77% 15.94% 12.27%
$266,771,751,904 25.33%
2003 $11,599,586,131 5.23% 6.56% 0.13% 3.80% 4.42% 3.83% 3.41% 0.91% 1.19% 0.97% 0.76%
2004 $19,832,792,275 11.37% 7.09% 0.63% 6.05% 7.06% 5.94% 5.35% 1.68% 2.22% 1.72% 1.37%
2005 $38,382,611,744 21.79% 8.12% 2.23% 8.93% 10.32% 8.63% 7.92% 3.06% 3.95% 3.05% 2.52%
2006 $32,022,356,402 24.78% 10.62% 4.39% 13.37% 15.28% 12.92% 11.97% 5.42% 6.79% 5.38% 4.54%
2007 $37,492,229,442 28.38% 12.05% 4.98% 15.39% 17.43% 14.95% 13.87% 6.49% 8.01% 6.50% 5.52%
2008 $1,683,652,587 25.87% 14.17% 4.21% 15.00% 16.81% 14.83% 13.61% 5.92% 7.33% 6.10% 5.02%
2010 $619,247,137 47.16% 6.46% 2.41% 10.89% 12.79% 11.40% 9.55% 4.79% 6.28% 5.29% 3.85%
2011 $170,816,877 25.11% 0.00% 0.00% 0.11% 0.19% 0.13% 0.07% 0.01% 0.03% 0.02% 0.01%
2012 $2,098,199,016 57.76% 0.06% 0.01% 0.23% 0.35% 0.23% 0.16% 0.04% 0.07% 0.04% 0.02%
2013 $12,127,713,656 94.26% 0.02% 0.00% 0.14% 0.24% 0.13% 0.09% 0.01% 0.03% 0.01% 0.01%
$156,029,205,267 18.17%
PRIMEX indicies
ARM1 $7,300,085,262 25.85% 7.80% 3.87% 10.35% 12.16% 9.79% 9.07% 3.42% 4.52% 3.30% 2.75%
ARM2 $3,613,989,480 25.83% 11.09% 6.85% 17.17% 19.80% 16.41% 15.24% 6.60% 8.40% 6.42% 5.46%
FRM1 $4,016,098,290 26.40% 9.07% 2.88% 10.55% 12.10% 10.39% 9.39% 4.42% 5.56% 4.47% 3.69%
FRM2 $5,648,337,139 26.35% 11.53% 4.75% 16.30% 18.51% 16.00% 14.67% 7.61% 9.33% 7.69% 6.51%
2003 $37,983,702 5.91% 20.26% 0.58% 14.29% 17.08% 14.77% 12.56% 5.75% 7.36% 6.18% 4.86%
2004 $2,627,630,613 9.01% 21.78% 2.70% 24.71% 29.77% 23.54% 21.38% 11.09% 14.12% 10.78% 9.24%
2005 $24,299,572,021 17.87% 26.86% 9.82% 37.66% 43.26% 35.84% 33.40% 19.40% 23.42% 18.80% 16.67%
2006 $45,139,335,762 28.31% 31.84% 22.79% 51.84% 57.62% 49.73% 47.00% 27.90% 32.75% 27.04% 24.38%
2007 $33,627,895,223 38.43% 32.53% 25.92% 53.43% 59.40% 51.26% 48.42% 28.43% 33.35% 27.61% 24.86%
2008 $138,191,206 38.52% 25.21% 23.13% 32.58% 37.00% 31.57% 29.27% 16.62% 20.00% 16.39% 14.36%
$105,870,608,527 25.63%
As % of the current balance
PRIME
OPTION-ARM
SUBPRIME
ALT-A
Source: Credit Suisse, CoreLogic
HPA scenarios (annual home price change, %):
(1) Base: HPA 7 4 3 3 3 3; (2) Stress: HPA 0 -1 2 3 3 3;
(3) Optimistic: HPA 12 7 5 4 3 3; (4) CS HPA: Credit Suisse State- and CBSA-level forecast
Unemployment Rate (cumulative change, %): -0.5 -0.8 -1.3 -1.8 -2.0 -2.0
16 January 2014
Global Securitized Products Weekly 32
Exhibit 46: Projected Cumulative Loss by Loan Rate Type in 10 Years (11/01/2013 as of date)
Current Balance Factor *Realized
Loss
Cum
Default
(base)
Cum
Default
(stress)
Cum
Default
(CS HPA)
Cum
Default
(optimistic)
Cum
Loss
(base)
Cum
Loss
(stress)
Cum Loss
(CS HPA)
Cum Loss
(optimistic)
2003 $2,589,370,739 2.20% 3.13% 41.07% 48.43% 43.66% 35.98% 21.83% 27.51% 24.19% 18.27%
2004 $10,478,936,594 4.16% 4.64% 50.15% 57.19% 51.64% 44.60% 26.80% 32.97% 28.59% 22.64%
2005 $36,842,781,807 10.23% 12.58% 62.55% 68.38% 63.09% 57.37% 34.18% 40.71% 35.35% 29.44%
2006 $71,677,535,592 20.59% 26.32% 69.09% 74.12% 69.49% 64.42% 41.13% 47.68% 42.26% 36.13%
2007 $46,558,544,598 33.53% 29.46% 66.94% 71.96% 67.28% 62.23% 38.43% 44.82% 39.52% 33.57%
2008 $148,634,505 47.46% 20.67% 53.98% 59.61% 52.46% 48.97% 25.06% 30.95% 24.81% 20.99%
2009 $93,897,679 50.59% 31.36% 70.07% 74.97% 71.07% 65.53% 39.71% 45.98% 41.37% 34.78%
2010 $477,426,562 50.36% 10.61% 36.83% 43.16% 36.28% 31.71% 14.38% 19.38% 14.47% 11.10%
2011 $496,013,386 63.01% 6.84% 41.06% 46.77% 40.58% 36.32% 22.93% 27.76% 23.35% 19.58%
2012 $747,683,352 71.29% 9.31% 41.60% 45.01% 42.51% 38.81% 25.12% 29.27% 26.32% 22.17%
2013 $1,779,092,039 82.09% 1.78% 29.43% 34.50% 29.03% 25.29% 13.07% 17.16% 13.36% 10.26%
2003 $7,160,096,335 10.48% 2.97% 15.15% 18.31% 16.07% 13.16% 7.71% 9.85% 8.51% 6.45%
2004 $16,773,916,827 18.39% 4.27% 18.64% 22.17% 19.23% 16.16% 9.35% 11.93% 10.05% 7.76%
2005 $24,264,821,198 28.04% 11.53% 27.31% 31.34% 28.06% 24.28% 15.56% 19.26% 16.52% 13.12%
2006 $31,213,372,017 33.70% 24.61% 34.93% 39.18% 35.74% 31.61% 22.64% 27.02% 23.76% 19.55%
2007 $24,318,619,663 44.00% 22.57% 35.88% 40.01% 36.76% 32.57% 22.84% 27.16% 24.05% 19.76%
2008 $889,637,754 51.76% 20.62% 36.64% 40.27% 37.14% 33.68% 22.10% 26.12% 23.06% 19.23%
2009 $214,822,467 53.67% 21.70% 35.49% 39.76% 36.83% 32.21% 22.10% 26.37% 23.66% 19.08%
2010 $276,714,410 35.18% 15.47% 22.42% 26.28% 22.43% 19.40% 9.77% 12.91% 10.23% 7.74%
2011 $865,081,678 66.14% 3.20% 23.91% 27.90% 24.83% 20.82% 15.48% 18.81% 16.47% 13.20%
2012 $2,824,507,471 77.00% 2.55% 22.13% 25.63% 23.43% 19.38% 12.56% 15.76% 13.95% 10.37%
2013 $3,886,655,410 84.41% 1.38% 23.06% 26.82% 23.92% 20.14% 14.28% 17.73% 15.32% 11.88%
2003 $1,252,515,759 4.83% 0.49% 8.79% 10.81% 8.52% 7.61% 3.18% 4.17% 3.16% 2.62%
2004 $12,663,300,009 11.35% 2.42% 16.90% 20.58% 16.27% 14.48% 6.98% 9.07% 6.83% 5.72%
2005 $34,860,888,482 21.44% 9.20% 26.84% 31.08% 26.13% 23.74% 12.90% 15.91% 12.78% 10.93%
2006 $41,930,644,462 26.31% 18.97% 39.51% 44.19% 38.67% 35.87% 20.69% 24.54% 20.57% 18.05%
2007 $35,630,753,378 33.07% 21.67% 40.96% 45.79% 39.43% 37.15% 20.61% 24.38% 20.20% 18.04%
2008 $334,290,545 38.87% 12.47% 28.60% 33.46% 27.32% 25.02% 12.19% 15.24% 12.02% 10.26%
2010 $27,931,734 66.38% 2.37% 24.70% 29.42% 25.72% 21.01% 10.09% 13.79% 11.20% 7.66%
2012 $92,440,648 97.00% 1.08% 33.18% 39.18% 32.68% 28.39% 15.70% 20.18% 15.95% 12.49%
2003 $6,468,889,005 10.72% 0.86% 7.05% 8.77% 7.41% 6.07% 3.76% 4.84% 4.08% 3.16%
2004 $11,517,939,189 18.26% 1.74% 12.51% 15.07% 12.95% 10.84% 7.04% 8.78% 7.48% 5.97%
2005 $36,450,457,167 30.11% 5.48% 19.84% 23.11% 20.04% 17.49% 11.03% 13.49% 11.44% 9.44%
2006 $43,808,286,748 32.39% 12.62% 34.25% 38.45% 34.64% 31.03% 20.99% 24.65% 21.72% 18.48%
2007 $40,661,690,595 39.49% 13.57% 36.59% 41.12% 36.71% 33.05% 21.00% 24.79% 21.60% 18.41%
2008 $44,316,797 43.97% 8.09% 30.33% 35.02% 31.39% 26.68% 15.92% 19.54% 17.18% 13.49%
2009 $1,046,363,543 48.83% 6.66% 18.97% 23.57% 20.56% 15.81% 11.39% 14.86% 12.63% 9.17%
2010 $40,510,217 65.55% 1.59% 15.20% 20.05% 16.42% 11.87% 6.73% 9.86% 7.88% 4.83%
2012 $29,009,634 82.12% 1.72% 29.53% 35.07% 31.35% 25.29% 15.26% 19.66% 16.86% 12.24%
2003 $6,315,971,841 6.42% 0.21% 4.25% 4.92% 4.24% 3.82% 0.80% 1.09% 0.83% 0.64%
2004 $14,582,902,651 12.37% 0.81% 6.29% 7.36% 6.15% 5.57% 1.58% 2.13% 1.59% 1.26%
2005 $26,013,744,797 22.48% 2.51% 8.61% 10.04% 8.25% 7.59% 2.65% 3.51% 2.61% 2.14%
2006 $18,281,878,966 26.37% 5.15% 12.27% 14.18% 11.68% 10.89% 4.39% 5.67% 4.28% 3.60%
2007 $17,551,452,195 29.43% 5.73% 14.12% 16.06% 13.54% 12.70% 5.28% 6.63% 5.20% 4.44%
2008 $945,196,617 28.60% 5.44% 14.61% 16.36% 14.27% 13.24% 4.79% 6.09% 4.80% 3.96%
2010 $13,536,366 5.57% 0.00% 0.11% 0.22% 0.12% 0.07% 0.01% 0.02% 0.01% 0.00%
2011 $16,341,423 12.68% 0.00% 0.03% 0.06% 0.04% 0.02% 0.00% 0.01% 0.00% 0.00%
2012 $145,407,950 57.39% 0.00% 1.62% 2.29% 1.53% 1.21% 0.34% 0.61% 0.33% 0.21%
2013 $699,333,882 80.54% 0.00% 0.53% 0.78% 0.51% 0.39% 0.08% 0.14% 0.09% 0.06%
2003 $5,283,614,291 4.28% 0.06% 3.09% 3.52% 3.16% 2.80% 0.89% 1.11% 0.96% 0.76%
2004 $5,249,889,624 9.28% 0.26% 4.81% 5.41% 4.83% 4.36% 1.60% 1.99% 1.68% 1.37%
2005 $12,368,866,947 20.47% 1.70% 8.84% 9.88% 8.71% 8.02% 3.51% 4.34% 3.56% 2.97%
2006 $13,740,477,436 22.93% 3.51% 13.28% 14.77% 13.14% 12.13% 6.01% 7.30% 6.12% 5.16%
2007 $19,951,298,322 27.32% 4.33% 14.76% 16.44% 14.58% 13.48% 6.69% 8.12% 6.82% 5.77%
2008 $738,455,970 23.05% 2.94% 14.11% 15.56% 14.21% 13.03% 6.57% 7.88% 6.95% 5.73%
2010 $605,710,771 56.59% 2.96% 10.87% 12.73% 11.35% 9.54% 4.72% 6.21% 5.21% 3.79%
2011 $154,475,455 28.02% 0.00% 0.12% 0.20% 0.14% 0.07% 0.02% 0.04% 0.02% 0.01%
2012 $1,952,791,066 57.79% 0.01% 0.11% 0.18% 0.12% 0.08% 0.01% 0.02% 0.01% 0.01%
2013 $11,428,379,774 95.25% 0.00% 0.11% 0.20% 0.11% 0.07% 0.01% 0.02% 0.01% 0.00%
PRIME
Product Loan Type
Fixed
ARM
ALT-A
Fixed
SUBPRIME
Deal Issue
Year
As % of the current balance
ARM
Fixed
ARM
Source: Credit Suisse, CoreLogic
16 January 2014
Global Securitized Products Weekly 33
Model Error Tracking
Exhibit 47: Voluntary Prepayment Rate Forecast Error, in CPR
Sector
Deal Issue
Year
Nov 13
actual
Nov 13
model
Oct 13
actual
Oct 13
model
Sep 13
actual
Sep 13
model
Aug 13
actual
Aug 13
model
Jul 13
actual
Jul 13
model
Jun 13
actual
Jun 13
model
6 month
error
Alt-A 2004 10.75 10.40 11.25 10.37 11.85 10.47 12.60 11.50 11.57 12.05 11.68 11.98 0.49
Alt-A 2005 8.90 8.50 9.08 8.66 10.30 8.96 10.99 8.06 9.88 8.53 10.00 8.47 1.33
Alt-A 2006 6.93 7.38 7.15 7.44 8.12 7.55 8.61 5.93 7.31 6.05 7.59 6.05 0.89
Alt-A 2007 7.13 7.76 7.80 7.86 8.02 8.08 8.78 6.55 8.06 6.72 7.76 6.77 0.64
Option ARM 2004 7.03 3.91 6.97 3.86 7.04 3.82 6.99 3.49 6.15 3.47 6.11 3.37 3.06
Option ARM 2005 4.66 2.69 4.57 2.65 5.21 2.63 5.04 2.32 4.00 2.31 4.50 2.24 2.19
Option ARM 2006 3.41 1.77 2.92 1.73 3.57 1.71 3.22 1.50 3.33 1.48 2.65 1.43 1.58
Option ARM 2007 2.95 2.06 2.75 2.02 3.31 2.01 3.39 1.74 3.32 1.71 2.53 1.66 1.17
Prime 2004 16.56 18.56 17.51 18.63 20.11 18.90 21.08 22.59 19.11 22.82 19.66 22.72 -1.70
Prime 2005 17.67 17.43 18.04 17.79 21.21 18.39 21.66 17.08 19.97 16.91 18.85 16.86 2.16
Prime 2006 15.79 17.79 16.91 17.94 20.20 18.40 20.28 14.62 19.59 14.56 17.93 14.60 2.13
Prime 2007 17.09 17.70 17.57 18.09 21.47 18.88 22.74 16.55 18.92 16.50 18.49 16.52 2.01
Prime 2012 15.20 17.41 10.07 13.34 13.42 13.17 26.74 14.61 29.68 26.33 35.78 34.96 1.85
Prime 2013 4.98 7.63 2.88 5.75 6.19 5.64 9.31 7.30 10.26 9.73 9.87 13.26 -0.97
Subprime 2004 6.15 2.96 5.99 3.00 6.87 3.04 7.56 2.88 6.42 3.15 6.67 3.24 3.56
Subprime 2005 3.66 1.76 3.54 1.78 3.89 1.79 4.06 1.67 3.44 1.78 3.71 1.82 1.95
Subprime 2006 2.50 1.34 2.29 1.34 2.69 1.34 2.65 1.22 2.40 1.28 2.26 1.29 1.16
Subprime 2007 2.38 1.33 2.40 1.32 2.75 1.31 2.51 1.21 2.29 1.27 2.21 1.28 1.14
Source: Credit Suisse, CoreLogic
Exhibit 48: Default Rate Forecast Error, in CDR
SectorDeal Issue
Year
Nov 13
actual
Nov 13
model
Oct 13
actual
Oct 13
model
Sep 13
actual
Sep 13
model
Aug 13
actual
Aug 13
model
Jul 13
actual
Jul 13
model
Jun 13
actual
Jun 13
model
6 month
error
Alt-A 2004 2.61 3.64 2.31 3.65 2.67 3.71 3.13 3.84 3.19 3.99 3.29 4.12 -0.96
Alt-A 2005 4.12 4.84 3.63 4.88 4.09 4.95 4.80 5.03 4.75 5.12 5.22 5.22 -0.57
Alt-A 2006 5.46 7.31 5.17 7.44 5.91 7.54 6.79 7.56 6.72 7.72 7.20 7.84 -1.36
Alt-A 2007 5.91 8.14 5.45 8.16 6.04 8.34 6.87 8.41 7.37 8.56 7.80 8.76 -1.83
Option ARM 2004 4.83 5.88 2.91 6.24 4.06 6.34 5.92 6.66 5.02 6.80 5.01 6.80 -1.83
Option ARM 2005 5.16 8.03 4.94 8.07 5.79 8.36 7.71 8.47 8.07 8.74 8.18 8.98 -1.80
Option ARM 2006 6.35 11.24 6.90 11.41 7.98 11.81 8.93 11.84 9.79 12.15 10.91 12.42 -3.33
Option ARM 2007 7.54 13.36 8.63 12.58 8.32 14.15 10.13 14.18 10.27 14.34 11.51 14.70 -4.49
Prime 2004 1.34 2.18 0.82 2.11 1.25 2.17 1.44 2.26 1.46 2.30 1.60 2.30 -0.90
Prime 2005 2.33 2.46 2.17 2.50 2.45 2.58 2.59 2.60 2.51 2.66 2.96 2.67 -0.08
Prime 2006 2.86 3.38 3.08 3.49 3.78 3.55 4.49 3.54 4.06 3.59 4.07 3.66 0.19
Prime 2007 3.65 4.47 3.47 4.53 4.12 4.65 4.47 4.63 5.02 4.75 4.11 4.81 -0.50
Prime 2012 0.00 0.00 0.31 0.02 0.00 0.02 0.00 0.02 0.00 0.02 0.00 0.01 0.04
Prime 2013 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Subprime 2004 3.86 4.35 3.30 4.35 3.71 4.37 4.55 4.52 3.59 4.55 4.41 4.63 -0.56
Subprime 2005 5.40 6.36 5.03 6.34 5.73 6.46 6.46 6.62 6.19 6.74 6.71 6.86 -0.64
Subprime 2006 6.64 8.07 6.29 7.98 6.87 8.09 7.36 8.29 7.10 8.44 7.86 8.62 -1.23
Subprime 2007 6.56 7.49 5.69 7.46 6.24 7.53 6.71 7.67 7.17 7.80 7.91 7.93 -0.93
Source: Credit Suisse, CoreLogic
16 January 2014
Global Securitized Products Weekly 34
Exhibit 49: Loss Severity Forecast Error: in percentage
SectorDeal Issue
Year
Nov 13
actual
Nov 13
model
Oct 13
actual
Oct 13
model
Sep 13
actual
Sep 13
model
Aug 13
actual
Aug 13
model
Jul 13
actual
Jul 13
model
Jun 13
actual
Jun 13
model
6 month
error
Alt-A 2004 48.13 53.08 47.54 52.66 50.99 52.19 49.08 53.64 49.67 46.48 49.72 46.27 -1.53
Alt-A 2005 54.74 60.28 54.82 59.93 52.79 59.35 52.66 60.92 52.37 55.17 54.84 54.97 -4.73
Alt-A 2006 62.11 66.99 62.77 66.69 62.13 66.20 60.20 67.90 61.64 62.84 61.01 62.68 -3.91
Alt-A 2007 61.69 66.06 62.19 65.51 61.76 64.89 60.95 66.52 60.57 62.27 59.97 62.07 -3.37
Option ARM 2004 51.37 49.51 50.31 48.97 51.80 48.54 55.92 50.42 45.40 40.81 55.93 40.93 5.26
Option ARM 2005 62.06 60.47 60.75 59.93 55.80 58.98 53.70 60.86 53.78 51.79 57.33 51.48 -0.01
Option ARM 2006 65.18 64.19 65.42 63.91 61.91 63.19 60.94 65.09 60.54 57.32 59.99 57.00 0.55
Option ARM 2007 61.69 64.23 60.50 63.43 62.58 63.00 60.00 64.85 59.78 58.23 60.27 58.02 -1.16
Prime 2004 41.05 30.15 29.91 29.53 40.54 29.41 38.07 31.10 38.59 30.44 36.98 30.41 7.35
Prime 2005 39.93 38.55 42.53 37.99 39.76 37.02 39.88 39.18 38.50 38.68 38.75 38.82 1.52
Prime 2006 44.54 45.78 43.26 45.18 43.61 44.46 40.05 46.49 42.71 45.59 40.22 44.93 -3.01
Prime 2007 45.94 46.61 45.94 46.19 45.85 45.40 44.59 47.64 43.96 46.78 41.66 46.44 -1.85
Prime 2012 1.06 58.96 19.04 20.82 21.22 21.86 21.59 39.92
Prime 2013 3.63 14.26 26.82 13.42 21.73
Subprime 2004 78.37 69.74 79.21 69.50 77.64 69.23 78.32 71.71 71.17 71.35 76.97 71.48 6.45
Subprime 2005 76.43 76.86 76.70 76.75 75.81 76.34 74.85 78.50 74.07 78.30 74.10 77.98 -2.13
Subprime 2006 82.14 83.53 80.55 83.17 81.92 82.94 79.96 84.43 79.55 84.29 78.67 83.70 -3.21
Subprime 2007 82.83 81.45 80.30 81.27 79.84 80.68 80.48 82.54 78.15 82.42 77.84 82.23 -1.86
Source: Credit Suisse, CoreLogic
16 January 2014
Global Securitized Products Weekly 35
Loan Level Collateral Performance Trends
Exhibit 50: Prepayment Trends Exhibit 51: Default Trends
0
5
10
15
20
25
30
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
vo
lun
tary
CP
R,
%
Alt-A Fixed Alt-A ARMPrime Fixed Prime ARM
Subprime Fixed Subprime ARM
Option ARM
0
2
4
6
8
10
12
14
16
18
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
CD
R,
%
Alt-A Fixed Alt-A ARMPrime Fixed Prime ARMSubprime Fixed Subprime ARMOption ARM
Source: Credit Suisse, CoreLogic Source: Credit Suisse, CoreLogic
Exhibit 52: Severity Trends Exhibit 53: 60+ Delinquency (MBA) Trends
30
40
50
60
70
80
90
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
Se
ve
rity
, %
Alt-A Fixed Alt-A ARMPrime Fixed Prime ARMSubprime Fixed Subprime ARMOption ARM
0
10
20
30
40
50
60
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
60
+ d
eli
nq
ue
nc
y,
%
Alt-A Fixed Alt-A ARMPrime Fixed Prime ARMSubprime Fixed Subprime ARMOption ARM
Source: Credit Suisse, CoreLogic Source: Credit Suisse, CoreLogic
16 January 2014
Global Securitized Products Weekly 36
Exhibit 54: Modification (% of 60+ delq.) Exhibit 55: Principal Forgiveness Share
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
60
+ M
od
ific
ati
on
, %
Alt-A Fixed Alt-A ARMPrime Fixed Prime ARMSubprime Fixed Subprime ARMOption ARM
0
10
20
30
40
50
60
70
80
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
Pri
nc
ipa
l F
org
ive
ne
ss
Sh
are
, %
Alt-A Fixed Alt-A ARMPrime Fixed Prime ARMSubprime Fixed Subprime ARMOption ARM
Source: Credit Suisse, CoreLogic Source: Credit Suisse, CoreLogic
Exhibit 56: Servicer Advancing (% of 60+ delq.) Exhibit 57: Short Sale Trends
40
50
60
70
80
90
100
110
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
60
+ A
dva
nc
ing
, %
Alt-A Fixed Alt-A ARMPrime Fixed Prime ARMSubprime Fixed Subprime ARMOption ARM
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
Sh
ort
Sa
le, %
Alt-A Fixed Alt-A ARMPrime Fixed Prime ARMSubprime Fixed Subprime ARMOption ARM
Source: Credit Suisse, CoreLogic Source: Credit Suisse, CoreLogic
16 January 2014
Global Securitized Products Weekly 37
Roll Rates Update
Exhibit 58: New Delinquency (Clean Current to D30) Exhibit 59: Clean Current to Prepayment
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
CC
->3
0 r
oll
ra
te, %
Alt-A Option ARM Prime Subprime
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
CC
->P
rep
ay r
oll
rate
, %
Alt-A Option ARM Prime Subprime
Source: Credit Suisse, CoreLogic Source: Credit Suisse, CoreLogic
Exhibit 60: Foreclosure to REO Exhibit 61: REO to Liquidation
0.0
0.5
1.0
1.5
2.0
2.5
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
FC
->R
EO
+ r
oll
ra
te,
%
Alt-A Option ARM Prime Subprime
0.0
5.0
10.0
15.0
20.0
25.0
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
RE
O->
Liq
uid
ati
on
ro
ll r
ate
, %
Alt-A Option ARM Prime Subprime
Source: Credit Suisse, CoreLogic Source: Credit Suisse
16 January 2014
Global Securitized Products Weekly 38
Servicer Trends
Exhibit 62: Months in Delinquency at Liquidation Exhibit 63: Short Sale Rate
15
20
25
30
35
40
45
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
mo
nth
s in
de
lin
qu
en
cy
BofA/Countrywide Wells Fargo
Chase Ocwen
Indymac Nationstar
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
Sh
ort
Sa
le, %
BofA/Countrywide Wells Fargo
Chase Ocwen
Indymac Nationstar
Source: Credit Suisse, CoreLogic Source: Credit Suisse, CoreLogic
Exhibit 64: Subprime P&I Advancing (% of 60+ delq.) Exhibit 65: Subprime Modification (% of 60+ delq.)
20
30
40
50
60
70
80
90
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
60
+ A
dva
nc
ing
, %
BofA/Countrywide Wells Fargo
Chase Ocwen
Indymac Nationstar
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
60
+ M
od
ific
ati
on
, %
BofA/Countrywide Wells Fargo
Chase Ocwen
Indymac Nationstar
Source: Credit Suisse, CoreLogic Source: Credit Suisse, CoreLogic
Exhibit 66: Subprime Principal Forgiveness Share
0
10
20
30
40
50
60
70
80
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
Pri
nc
ipa
l F
org
ive
ne
ss
Sh
are
, %
BofA/Countrywide Wells Fargo
Chase Ocwen
Indymac Nationstar
Source: Credit Suisse
Focus on Locus
New! CLO Bid List Calendar
January 2014
We invite you to access the new CLO Bid List Calendar on CS Plus Analytics (powered by Locus). The new CLO Bid List Calendar
provides you with direct access to view daily CLO/CDO/TRUPs BWICs, view CS Price Talk and access BWIC Trade Color.
Key features:
Single source to view daily CLO/CDO/TRUPs BWICs
View CS Price Talk (when available)
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Access and search future and historical bid lists
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Securitized Products < CLO Analytics < CLO Bid List Calendar
http:/ / plus.credit-suisse.com
Or access LOCUS through the Credit Suisse section of Markit Hub
..
GLOBAL FIXED INCOME AND ECONOMICS RESEARCH
Ric Deverell Eric Miller,
Global Head of Product Research Co-Head, Securities Research & Analytics 44 20 7883 2523 (212)538 6480
[email protected] [email protected]
GLOBAL SECURITIZED PRODUCTS RESEARCH
Roger Lehman
Global Head of Securitized Products Research
(212) 325 2123
RESIDENTIAL MORTGAGES CMBS
Mahesh Swaminathan Roger Lehman, Managing Director
Group Head Group Head
(212) 325 8789 (212) 325 2123
[email protected] [email protected]
AGENCY MBS NON-AGENCY MBS
Qumber Hassan Marc Firestein Serif Ustun, CFA Sylvain Jousseaume, CFA
(212) 538 4988 (212) 325 4379 (212) 538 4582 (212) 325 1356
[email protected] [email protected] [email protected] [email protected]
Vikram Rao
(212) 325 0709
EUROPE JAPAN
Carlos Diaz Tomohiro Miyasaka
44 20 7888 2414 81 3 4550 7171
[email protected] tomohiro.miyasaka@credit-
suisse.com
MODELING AND ANALYTICS
David Zhang
Group Head
(212) 325 2783
Tony Tang
(212) 325 2804
Yihai Yu
(212) 325 7922
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(212) 538 0525
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(212) 325 0578
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Andrew Zhang
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Disclosure Appendix
Analyst Certification The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Important Disclosures Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html . Credit Suisse's policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market that may have a material impact on the research views or opinions stated herein. The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions. Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report. At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report. As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report. For important disclosure information on securities recommended in this report, please visit the website at https://firesearchdisclosure.credit-suisse.com or call +1-212-538-7625. For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendations provided by the Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at http://research-and-analytics.csfb.com/docpopup.asp?ctbdocid=330703_1_en . Credit Suisse clients with access to the Locus website may refer to http://www.credit-suisse.com/locus For the history of recommendations provided by Technical Analysis, please visit the website at www.credit-suisse.com/techanalysis . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Emerging Markets Bond Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate. Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate.
Corporate Bond Fundamental Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector. Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These bonds may possess price risk in a volatile environment. Market Perform: Indicates a bond that is expected to return average performance in its sector. Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may be stable credits that, we believe, are overvalued or rich relative to the sector. Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector. Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer an investment view on the subject issue. Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment view on the issuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is a reasonable, non-material deduction based on an analysis of publicly available information.
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Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2014 CREDIT SUISSE AG and/or its affiliates. All rights reserved.
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
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