Securitization in Focus — July 2023
Asset-Backed Securities (ABS)
YTD new issue volume in 2023 has been dominated by autos (61.3%).
Solar Panels Shine
Though 1H 2023 issuance has been flat year-over-year, an increase is expected through year end.
Positives
- Potential savings for consumers in the form of lower utility
bills
- Incentive to pay through continued savings on bills
- Borrowers tend to be higher FICO consumers
- Lenders have lien on the home
Negatives
- Longer tenured loans (typically 25 years)
- Little performance on newer loan structures (interest only,
zero-interest or no-payment promotional periods)
- Declining efficiency of solar panels over time, reducing
savings
Fed Balance Sheet & Quantitative Tightening II
Historical Fluctuations
- Quantitative Easing cycles I, II and III/IV
- Tapering
- Quantitative Tightening I
- COVID Quantitative Easing (2020-2022)
- Operation Twist (2011-2012)
Since the beginning of the balance sheet reduction process in June
2022
- Treasuries down 12.5%
- MBS allocation down 7.0%
- Total balance sheet down 10.7%
(as of 26 Jul 2023)
Balance Sheet Reduction Progress
Residential Mortgage-Backed Securities (RMBS)
Housing Roller Coaster
National home prices have dropped from their 2022 peak but have
recovered and remain up roughly 40% over the past three years, as
the lack of supply continues driving prices higher.
The Golden Handcuffs
Nine out of every ten US homeowners with mortgages have a rate below 6%. The current rate is 7.27%, per Bankrate.com.
Pending Home Sales
(year-over-year)
15%
New Listings
22%
Total Number of Homes for Sale
17%
FDIC Liquidation of Silicon Valley Bank and Signature Bank — Update
Passthrough MBS amount sold is approximately $50 billion (81% of total); CMO amount sold is approximately $12.7 billion (56% of total).
Commercial Mortgage-Backed Securities (CMBS)
Green shoots in office space?
San Francisco office owners are seeing more demand for office space, fueled by the growth from artificial intelligence (AI) companies.
US Office Leasing Volume
There may still be some pain to come but possibly we’ve turned the corner.
11.6%
2Q23 (quarter-over-quarter)
Led by:
- Bank and non-bank financial companies
- Technology
- Health care
- Law
Deliquency Rates by Property (30+ Days) (%)
Hospitality Update
Occupancy levels have yet to return to pre-COVID levels but are on par with 2021 and 2022.
Sources: Barclays, Citi, Deutsche Bank, Bank of America, TREPP.com, New York Federal Reserve.
See diamond-hill.com/disclosures for a full copy of the disclaimer.
The views expressed are those of Diamond Hill as of August 2023 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.
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