Securitization in Focus — November 2024

Bond Market Performance Update

While the year is not over yet, the securitized market has held up well in 2024, trailing only the corporate sector on a year-to-date basis. Within securitized, non-agency commercial mortgage-backed securities (CMBS) have led the investment grade market, with index-eligible non-agency CMBS returning 6.83% through the end of November, fueled by a strong Q1 relative to the rest of the market and steady returns in Q2 and Q3.

Total Return (%)

Asset-backed Securities

How is the consumer doing?

This seems to be one of the most common questions we hear. While delinquency rates have increased in some areas of the market (subprime auto, retail card and brick-and-mortar consumer lending), other areas have improved or stabilized over the past six months.

Delinquency Rates (%)

Commercial Mortgage-backed Securities

CMBS Issuance ($B)

CMBS private label issuance in 2024 has surged past $100 billion year-to-date, more than doubling 2023’s total of $46 billion, with a full month left in the year. This year’s private label issuance of $101 billion has also surpassed 2022’s $99 billion.

Finding Value in CMBS Markets

Non-agency CMBS spreads may have tightened throughout the year, but attractive opportunities remain when compared to both investment-grade and high-yield corporate debt. Achieving the right risk/reward balance demands thorough research, yet investors who truly understand their holdings can uncover rewarding prospects in the commercial sector.

Source: Wells Fargo, Bloomberg. CRE/CLO — Commercial Real Estate/Collateralized Loan Obligation. SASB — Single Asset, Single Borrower.

Monitoring Market Health Through Special Servicing

Special servicing plays a vital role in the CMBS market, where third-party managers step in to handle loans for borrowers facing payment difficulties. The special servicing rate is a key indicator of the commercial real estate (CRE) market’s condition, helping to identify emerging risks. Over the past month, special servicing rates have risen across most CMBS sectors, with the exception of Industrial and Lodging. Multifamily experienced the most significant increase, climbing from 6.21% to 7.37%.

Special Servicing Rates (%)

Residential Mortgage-backed Securities

Non-Agency RMBS issuance remains robust, showing a 92% increase compared to the prior year.

RMBS Issuance ($B)

Key
Non-QM — Non-qualified mortgages
RPL/NPL — Re-Performing Loans / Non-Performing Loans
CRT — Charitable Remainder Trust
SFR — Single-family rentals
HELOC/CES — Home Equity Line of Credit/Closed-End Second Mortgage

Tracking Trends in the Housing Market

• Existing home sales rose slightly in October, increasing from 3.83 million to 3.96 million, while new home sales declined month-over-month from 738,000 to 610,000.
• Housing starts also fell, dropping from 1.35 million to 1.31 million, alongside a slight decrease in the months' supply of existing homes, which ticked down from 4.1 to 4.0.
• Elevated mortgage rates have dampened overall housing activity, pushing many key metrics to historic lows.
• Existing home sales hit a 14-year low, dropping to 3.83 million units.
• New home sales, meanwhile, reached approximately 738,000, marking a 6% year-over-year increase.
• Home affordability remains a major challenge, with record-high home prices and elevated mortgage rates keeping it near all-time lows.
• Lower sales activity and owners steadfastly holding onto low locked-in rates have reduced mortgage demand. While refinance and mortgage applications are up year-over-year, they remain far below levels seen between 2019 and 2022.