Asset-backed Securities
October was a record-setting month for the ABS new issue market. For the first time since 2016, monthly issuance hit $40 billion as issuers rushed to the market before the US election.
On the second to last day of October, year-to-date issuance surpassed $300 billion, which has only been done twice ($322B in 2005 and $309B in 2006).
ABS Issuance ($B)
Something new!
The ABS market priced the first subscription finance facility (SFF) security in October, a new sector that exposes investors to assets typically held on bank balance sheets. The SFF market is roughly $1 trillion, fueled by the growth of private capital markets, according to Fitch.
SFF is a credit line to private capital funds secured by a first lien over the uncalled capital commitments of a fund’s limited partners. Generally, they are structured as revolving credit facilities, and SFF receivables represent rights to loan repayments from private capital funds.
In other news...
Auto
Prime auto ABS collateral performance was little changed month-over-month but weaker year-over-year. Subprime auto ABS delinquencies rose slightly while default rates dropped.
Marketplace
On a year-over-year basis, Marketplace lending-backed deals saw improvement, while deals issued by branch lenders saw delinquencies and defaults rise.
Credit Card
Credit card ABS delinquencies and charge-offs were little changed month-over-month but weaker on a year-over-year basis as performance continues to normalize
Commercial Mortgage-backed Securities
CMBS Issuance ($B)
CMBS private label issuance continued to surge, closing in on $100B year-to-date and more than doubling 2023’s issuance ($46B) with just under two months to go. 2024 issuance has now pushed past 2022’s ($99B).
Delinquency Rates (%)
Except the office sector, all major commercial property types experienced decreases or held steady month-over-month from a delinquency standpoint.
The office sector saw delinquencies increase over 100 basis points (bps) to 9.37%, the sector’s highest rate since July 2012 (10.34%).
More than 60% of newly delinquent loans in October were in the office segment. It should be noted that one large office loan that previously was current became 30 days delinquent in October, skewing the overall number higher.
Shifting CMBS mix
The composition of CMBS outstanding has experienced notable shifts from before COVID to today, reflecting changing market dynamics. Previously, the CMBS market was dominated by conduit loans, accounting for 66% of the total, while fixed rate SASB (Single Asset, Single Borrower) and floating SASB made up 15% and 13%, respectively, and CRE CLOs (commercial real estate collateralized loan obligation) represented 6%.
Now, the landscape has evolved with conduit loans decreasing to 50% of the market, while floating SASB has nearly doubled to 24%, and CRE CLO has almost doubled to 11%. This transformation highlights a substantial move away from fixed rate products, which have decreased from 81% to 65%, as market participants increasingly favor floating rate structures to better navigate current economic conditions.
Residential Mortgage-backed Securities
Non-Agency RMBS issuance remains strong, up 102% vs last year, though down 13% relative to 2022.
Non-Agency RMBS Issuance ($B)
Key
CAS/STACR — Connecticut Avenue Securities bonds/Structured Agency Credit Risk bonds
Non-QM — Non-qualified mortgages
RPL/NPL — Re-Performing Loans / Non-Performing Loans
SFR — Single-family rentals
Additional market updates…
- Home prices increased again in August 2024, +4.2% year-over-year.
- 20 out of 20 cities saw positive home price appreciation (HPA) over the last year. Since August 2022, most of
the 20 cities showed positive HPA, with New York City and Chicago +13-14%, while Phoenix and Dallas were down 0.2-2.0%. Over 3 years, HPA goes as high as +25-40%.
- Non-qualified mortgage 60+ delinquencies reached 3.16%, an increase of 1.5% since January 2023. By vintage: 2023 60+ delinquencies are at 4%, 2022 60+ delinquencies are 3.4% and 2021 60+ delinquencies are 3.5%. Delinquencies are still within expectations, but 2023 delinquencies rose the most quickly, a signal that high mortgage rates are a burden for Non-QM borrowers.
- Prime RMBS 60+ delinquencies are 0.45%, flat for the past year. Given the 50%+ average home price appreciation since COVID, homeowner balance sheets have vastly improved, and more prime borrowers have tapped home equity lines of credit or closed-end second financing to cash out.
Sources: Deutsche Bank, Trepp.
See diamond-hill.com/disclosures for a full copy of the disclaimer.
The views expressed are those of Diamond Hill as of November 2024 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.