March 27, 2020

Structured Products Research

RMBS Strategy Vipul Jain, CFA

Senior Analyst
Non-Agency RMBS Weekly vipul.jain@wellsfargo.com
(212) 214-5738
Slight Reprieve; Non-QM Update Philip Hong, CFA
Analyst
Eventful Week Ends with Non-Agency Recovering philip.hong@wellsfargo.com
This week saw many notable headlines, including a massive stimulus (212) 214-8721
package, U.S. taking the lead in confirmed COVID-19 cases, and the
Samuel Cecil
impending economic slowdown showing up in macro data. On the
Analyst
bright side, it seems that the Non-Agency market is settling down a
samuel.m.cecil@wellsfargo.com
bit. We think the Fed’s actions have stabilized the Agency MBS (704) 410-6082
market, relieving selling pressure from investors in the meantime,
which has indirectly benefitted mortgage credit. However, several key
concerns have also emerged over the week surrounding delinquencies. Contents Page
As delinquencies are expected to increase, the advancing capabilities
of servicers come into question, especially for many non-bank Market Overview 2
participants. Another concern is that GSE payment forbearance plans Non-QM: Implications of
for COVID-19-affected borrowers could be abused, thus leading to Current Environment 5
elevated delinquencies in CRT deals in the near term and risk GSEs Introduce a New Payment
extending the bonds. In terms of recommendations, we turned Deferral Program 12
overweight on IG seasoned CRT LCFs and AAA Prime 2.0 earlier this
Data Tracker 13
week. AAA RPLs and Non-QM also remain attractive.

Non-QM: Implications of Current Environment

We take a wholesale revisit of the Non-QM sector and revise our
Links to Recent Research
issuance expectations to $10 to 15 billion. With delinquencies
expected to spike, coupon payments to the bonds should not be
Non-Agency Alert - Overweight AAA
affected as servicers are required to advance until 180 days DQ, and
Prime 2.0, Seasoned CRT
there is ample excess spread. In our opinion, at the top of the stack,
slower expected speeds are the greater concern due to the risk of Agency MBS Refi Monitor - Index
extension, while A2 and A3s would become longer if delinquency Crashes as Mortgage Rates Surge
triggers fail. At current levels, we think the AAA seniors look
attractive, with heavy levels of CE working to reduce concerns of losses Non-Agency Alert - Little Fed
and the protection afforded by the delinquency trigger. Support in Mortgage Credit

GSEs Introduce a New Payment Deferral Program Non-Agency RMBS Weekly - At

Continuing their response to the COVID-19 outbreak, both GSEs Least It’s Friday…
introduced a payment deferral option, as a new loss mitigation
solution to allow borrowers to catch up after exiting temporary
payment forbearance. In terms of cash flow implications to CRT, a
payment deferral in itself would not lead to losses to the deal. The Join Our Web Portal
direct cash flow effect is that at most two months of scheduled We value your time and readership. You
principal would be deferred to the end, so the extension should be or your colleagues can read all our
minimal. Overall, we see this as a net positive for CRT as it reduces the research and subscribe to our mailing
list by entering our web portal. Please
odds of a servicer considering more intensive modification options. go to wellsfargoresearch.com and click
on “Create Account”.

Please see page 19 for important disclosures and analyst

certifications. All estimates/forecasts are as of 03/27/20 unless
otherwise stated. 03/27/20 at 6 pm ET

This report is available on wellsfargoresearch.com and on Bloomberg WFRE

Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Market Overview
Non-Agency Market Recovering
This week saw many notable headlines regarding the
effects of and responses to the COVID-19 outbreak.
Yesterday, the U.S. surpassed China in the number of
officially confirmed COVID-19 cases. The fiscal stimulus
bill passed the Senate early Wednesday and the House
today. However, initial jobless claims skyrocketed to 3.3
million, easily surpassing estimates and was quadruple the
previous record. Our economists think that this is just the
beginning, with businesses continuing to shut down or
downsize (link). They are also now forecasting a deeper
contraction in the U.S. economy of 5% over Q2 and Q3,
before starting to recover in Q4 (link). Consumer
sentiment in March also fell 11.9 points MoM, the largest
monthly decline since 2008.
On the bright side, after a tumultuous beginning of the
week, it seems that the Non-Agency market is settling
down a bit. Although spreads are still wider than last
Thursday’s close, they have tightened back from mid-week
levels (Exhibit A1). CRT prices seem to be bottoming as
well (please see the attached price history). We think the
Fed’s actions have stabilized the Agency MBS market,
relieving selling pressure from investors in the meantime,
which has indirectly benefitted the Non-Agency market.
Servicer Liquidity Concerns Mounting
Several key concerns have also emerged over the week
surrounding mortgage delinquencies. As delinquencies are
expected to increase in the near term, the advancing
capabilities of servicers come into question, especially for
many non-bank participants who may not be adequately
capitalized. While the fiscal stimulus bill does not contain
explicit language on servicer funding, it does give the
Treasury some discretion on providing aid to industries
that are experiencing troubles from the COVID-19
outbreak. Treasury Secretary Mnuchin announced
yesterday that he has formed a task force to address
potential cash flow pressures in servicers. As servicers
serve a crucial role in the functioning of the mortgage
market, we expect the Treasury will need to step in to
provide some sort of measure to resolve a liquidity crunch.
Potential Abuse in Payment Forbearance?
Another concern is that GSE payment forbearance plans
could be abused, thus leading to elevated delinquencies in
CRT deals in the near term. From our understanding of the
servicing guides, when considering a COVID-19-affected
borrower for a forbearance plan, servicers do not need to
require documentation for hardship. This opens up the
risk for abuse, as a borrower could simply claim financial
hardship for some near-term cash flow. Note that the
deferred payments will still need to be paid back after the
forbearance plan, but one concern is that some borrowers
may take advantage of the program even when they do not
need it. Since the suspended payments would count toward
a delinquency in CRT, a spike in the near term would trip
delinquency triggers, thus locking out principal and
extending the bonds.
Recommendations
We recommend IG seasoned CRT LCFs. While liquidity
remains a risk, we think much of the forced selling is done
for now. Prices showing signs of a rebound and they look
fundamentally cheap to us. With more deleveraging than
OTR bonds, they remain relatively short even if short-term
spikes in delinquencies lock out principal (Exhibit A2).
We also turned overweight on Prime 2.0 AAA super senior
PTs. We think they look attractive versus TBA with the
3.5% coupon at 5.5 points back. Convexity concerns have
dissipated with bonds in the high-90s prices. As the
Agency MBS market came roaring back, we think high-
quality assets such as AAA Prime 2.0 would be next to

Exhibit A1: Non-Agency RMBS Indicative Spreads Summary

Spread Levels 52-week Stats
Product WAL Benchmark 3/26 3/24 3/19 Average Median Min Max Std Dev

Prime 2.0 3.5% SSnr PT AAA 5y Pts bk TBA 5.500 6.000 5.000 1.221 1.063 0.813 5.500 0.835
Non-QM AAA 2y Swaps 500 600 350 108 95 78 500 66.6
RPL AAA 3-4y Swaps 325 385 300 93 85 70 325 45.4
NPL A1 (Unrated) 1-2y Swaps 950 1294 489 195 175 141 950 117.1
SFR AAA Floating 5y DM 300 400 300 101 92 86 300 41.4
Legacy Prime/Alt-A Non-IG 5-7y DM 475 550 425 146 135 115 475 63.8
Note: Due to the current nature of the CRT market, please refer to the attached price history instead. Non-QM spreads are nominal levels based on
pricing assumptions.
Source: Wells Fargo Securities

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Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Exhibit A2: Seasoned CRT Trigger Sample Scenarios

CAS 2016-C01 1M2 (87-08 px)

WAC 4.158 WALA 59

Min CE Test 4.75%
DQ Test 90++ ≤ 40% of sub stack
Scenario 1 Scenario 2 Scenario 3 Scenario 4
CPR 15 15 15 15
Ramp up to 10% over 6 mo, Ramp up to 5% over 6 mo, Ramp up to 20% over 6 mo,
Ramp up to 5% over 6 mo,
DQ stay at 10% for 6 mo, stay at 5% for 6 mo, stay at 20% for 6 mo,
ramp down to 2% over 12 mo
ramp down to 2% over 12 mo ramp down to 2% over 12 mo ramp down to 2% over 12 mo
DM 1,158 1,195 1,232 1,137
WAL 3.34 3.09 2.86 3.49
Locked Out Months 4-24 Months 6-23 Months 6-19 Months 3-25

Source: Intex, Bloomberg, Wells Fargo Securities

recover. We favor deals with higher concentrations of Issuance: Not Completely Closed, but Quiet
agency-eligible and bank retail channel loans, as they As expected, the primary market in Non-Agency appears
would be less affected by a disruption in the Non-Agency to be closed for business currently with little public noise
lending market. since JPMMT 2020-3 earlier last week. However, we did
track two RPL deals, CIM 2020-R2 and CSMC 2020-RPL2,
In this environment, we continue to recommend which appear to have been placed directly either last week
positioning up in quality. AAA RPLs and Non-QM also or this week. While we do not have great detail into the
remain attractive under reasonable base case scenarios pricing, the seniors totaled more than $500 million
assuming a slowdown in prepayments. For Non-QM deals, combined according to Bloomberg. In addition, Bloomberg
we dive into a deeper analysis in a later section. In rated did report Towd Point is moving forward with a seasoned
RPL, one bond that traded yesterday would offer mid-300s RPL deal. However, the reported expected pricing date is
to low-400s bps of spread, with a 4-5 year average life not until May 1.
(Exhibit A3). In terms of delinquency impact, rated RPL
deals generally do not have triggers. However, servicers are Trading: Massive Non-IG CMO Trading
not required to advance on delinquent loans, so scheduled Non-Agency CMO trading volume was the highest weekly
P&I payments to the deals would be reduced if volume we have tracked post-recession, increasing to $17.2
delinquencies spike. As less excess cash flow go toward the billion from $6.9 billion (Exhibit T2). The majority of the
AAA seniors, they would extend slightly. Prepayments volume occurred in non-IG on Wednesday, where we
should also slow down as fewer borrowers would be able to tracked more than $8.7 billion alone. Customers were net
refinance. sellers by roughly $635 million. In CRT, the secondary
market remained escalated, as weekly volume (which
Exhibit A3: TPMT 2019-4 A1 Scenarios TRACE counts separately as agency debt) was roughly flat
(Price=94.313) to last week at $1.97 billion (Exhibit T6). Customers were
CPR 5 6 7 8 9 net buyers by roughly $45 million. After peaking at $10.2
billion the week of Feb. 19, primary dealer net positions
Yield (%) 4.19 4.32 4.45 4.59 4.73
have dissipated and are now more in line with 2019
N-Spread 366 381 396 410 425 averages. For the week of Mar. 18, net positions were
Z-Spread 359 374 388 403 418 roughly flat at $7.5 billion (Exhibit T3).
WAL 5.07 4.55 4.12 3.76 3.45

Note: Assume 2 CDR, 40% Severity; Delinquency ramps up to 10%

over 6 months, stay at 10% for 6 months, then ramps down to 3%
over 12 months. No advancing of DQ P&I.
Source: Intex, Wells Fargo Securities

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Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Exhibit A4: Non-Agency RMBS Historical Issuance ($bn)

NPL/RPL
Issuance Year CRT Prime 2.0 SFR Non-QM Other* Total
/Seasoned
2014 10.81 8.79 16.48 6.74 42.83
2015 12.33 11.67 22.63 6.94 0.32 53.90
2016 13.51 4.61 17.57 4.87 0.91 41.47
2017 16.38 10.09 42.30 4.69 3.63 1.07 78.16
2018 17.80 17.36 47.64 6.86 11.35 8.39 109.41
2019 19.93 17.49 38.84 3.89 25.24 10.48 115.88
2020 YTD 7.83 7.40 7.73 1.25 4.48 1.30 29.99
2019 Jan-Mar 5.00 3.36 8.88 0.38 5.79 1.57 24.97

2020 Proj. 25 17 35 3 10-15 10 125

* "Other" includes servicing advances, MSR, reverse mortgage deals, second liens and other miscellaneous products. Issuance volume for Other
categories are tracked from 2017 onwards.
Source: Intex Solutions, Bloomberg L.P., Finsight, DBRS, KBRA, S&P, Fitch, Wells Fargo Securities

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Non-Agency RMBS Weekly
March 27, 2020
Non-QM: Implications of Current Environment
A long time ago (less than four months) in an economy that
now feels far, far away, the Non-QM market appeared set
to be the future growth engine in Non-Agency. While
delinquencies were starting to creep higher in certain
areas, the majority of this appeared to be driven more by
fast prepayments leading to adverse selection. However,
with the severe economic damage done by the coronavirus,
Non-QM origination appears to have dried up virtually
overnight. With this in mind, we take a wholesale revisit of
the sector looking at issuance expectations, highlight areas
where delinquencies could creep higher, and evaluate how
cash flows could be affected by increases in DQs.
Non-QM Origination on Pause
The disruption to Non-Agency lending has begun to rear
its head, as a number of Non-QM lenders recently halted
loan activity. One large lender in the space, Citadel
Servicing Corp, is pausing loan originations for 30 days,
citing California’s stay-at-home order for non-essential
workers and conditions in the financial markets as
reasons. Flagstar has also stopped providing warehouse
funding for Non-Agency mortgages, according to
Bloomberg, and in probably the most public and decisive
move to date, Friday morning a major issuer in the space
reportedly laid off 70% of its staff.
Even for the Non-QM lenders that remain open to
business, the mortgage process has been severely
hampered. We wrote about some potential roadblocks to
origination in our recent Agency MBS Weekly. Perhaps
more applicable to Non-QM, evaluating employment/
income continuity is going to be a greater challenge,
especially for small-business owners and self-employed
borrowers. Lenders are likely to err on the conservative
side and tighten the credit box significantly. Primary rates
should also increase considerably as lenders widen out
pricing. In addition, we expect prepayments in Non-QM to
slow dramatically in the near term, and more so in pools
with a higher percentage of alternative income
documentation types, which would also lessen the amount
of new loan supply from refinancing.
2020 Issuance Projection Revision
Through nearly the first three months of the year, Non-QM
issuance stands at roughly $4.5 billion, just more than $1
billion behind Q1 2019. Non-QM origination appears to
have already dried up, and we anticipate this to continue
as our economics team is currently calling for a recession
in Q2 and Q3. Once the economy rebounds, we do not
anticipate the Non-QM loan market immediately
WELLS FARGO SECURITIES
STRUCTURED PRODUCTS RESEARCH
rebounding as originators will have to rebuild their work
force, which reports indicate are already being displaced or
shifted to other products.
For issuance, there may be some loans which have already
been originated, but are yet to be securitized, which could
feed some securitizations in the downtime once the
issuance market stabilizes. However, we believe the Non-
QM issuance market will not rebound in force until
possibly the last few months of the year, in a best case
scenario. We recognize it is extremely difficult at this point
to have a clear view on Non-QM issuance, with the myriad
of unknowns. Therefore, we revise our issuance
expectations to $10 to 15 billion from $35 billion. We
believe already originated but not yet securitized Non-QM
loans could help the market achieve the $10 billion low bar,
while a late year rebound origination could help issuance
achieve the higher end of the spectrum.
Delinquencies Expected to Increase
In our previous research, delinquencies were starting to
creep higher in certain areas such as in full doc and bank
statement underwritings and in origination focused on
lower FICO borrowers. However, the increased
delinquencies appeared to be exacerbated by fast
prepayments leading to adverse selection. In today’s
economy, we now worry that the strong housing market
and economy in the past few years may have been hiding
cracks that were forming. We think the current market
stresses should exacerbate previous small cracks, as
borrowers with slightly more stressed financial conditions
could experience overall worse performance.
Unfortunately due to the lagged nature of the effects, we
don’t have DQ data to see where this weakness could be felt
first. Unlike severe damage caused by a natural disaster
such as hurricane, were the effects are more immediate as
homes are destroyed and insurance is called upon, it may
take some time before we begin to see the full effects of the
virus as borrowers burn through reserves and layoffs
continue to mount further into a recession.
We think it important to pay close attention to relatively
high concentrations in the usual suspects including low
FICOs, high LTVs, and high DTIs. In addition, the
concentration of self-employed borrowers should be
important as small businesses should be disproportionally
affected by the current virus. In Appendix B1-B2, we
highlight current concentrations in these areas across
deals issued over the past three years. However, due to the
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Non-Agency RMBS Weekly
March 27, 2020
nature of the data in Non-QM, we are unable to provide
current concentrations in self-employed borrowers and
instead only include numbers at issuance for the 2019
vintage.
Non-QM Cash Flow Effects from DQs
Servicer Advances until 180 Days or Non-Recoverable
With the anticipated nationwide spike in delinquencies,
the burden will first fall upon servicers. Evaluating deal
documents from multiple Non-QM shelves, servicers are
required to make advances including P&I, escrow and
customary out of pocket fees and expenses until the loan is
either 180 days MBA DQ or it is deemed to be non-
recoverable. This is slightly different from jumbo 2.0 deals,
where in many shelves the servicers are typically
responsible for advances until the loan is deemed non-
recoverable. Therefore, P&I payments to the bonds should
not be affected in the short-term, as the servicers are
responsible for advancing this amount.
Deal documents may indicate a shorter time frame for
servicer advances than 180 days as servicers would
typically modify the loan if necessary at this point, or start
foreclosure proceedings. For example, in DRMT 2018-1
documents, “the time frame for most loans to be eligible
for foreclosure referral will be around one hundred twenty
(120) days past due.”
Servicers Have Discretion on Loss Mitigation Plans
After the borrower becomes delinquent, going forward the
servicer will be responsible for assessing the borrower’s
hardship and for taking action if they believe it warranted
to achieve the best outcome for all parties and for overall
loss mitigation. Unlike CRT, where the GSEs have worked
to provide a clear path forward for borrowers affected by
COVID-19, in other Non-Agency products the discretion
falls more to the servicers. If the servicer deems action is
warranted, we think the first step for a delinquent
borrower will likely come in the form of short-term
temporary payment deferral plan, similar to the GSEs. An
example of this would be a temporary deferral of monthly
payments until the hardship is complete, with the goal of
bringing the borrower current afterward through either a
lump sum repayment or a repayment plan over time.
However, in more extreme scenarios, the servicer may use
longer-term solutions such as rate/term modifications or
principal or interest forbearance.
While a reduction in interest through payment deferral or
an adjustment in the interest payment would be covered by
the IO/Excess Servicing Strip, principal forbearance would
create a realized loss. However, Monthly Excess Cashflows
can be applied sequentially to recover Realized Losses in
6
WELLS FARGO SECURITIES
STRUCTURED PRODUCTS RESEARCH
current periods, as well as any Cumulative Realized Loss
Amounts.
Servicer Stress Concerns?
With DQs expected to spike nationwide, thinly capitalized
servicers could be stretched from a sudden substantial
increase in servicer advances. Concern around this is
mounting, as Fitch placed Freedom Mortgage’s senior debt
on negative rating watch and Mr. Cooper has asked for
Federal assistance. As mentioned earlier in this weekly,
late Thursday afternoon Treasury Secretary Mnuchin
indicated he had formed a task force of U.S. financial
regulators to deal with the impending liquidity issues.
While still of concern operationally, Non-QM deals have
some protection due to the nature of the product as a
funding mechanism. The deals typically include a
substantial amount of excess spread between the mortgage
pool’s GWAC and the deal’s weighted average coupon. This
excess is used to create an IO or Excess Servicing Strip,
which is available to reimburse the servicer for advances
beyond typical repayment methods such as borrowers
coming current or loans being liquidated. To the extent
that the Servicer fails to make a required P&I Advance, the
obligation will fall to the Master Servicer.
Credit Event Shifts Payments
Principal in Non-QM deals is typically applied pro-rata to
the A1-A3 seniors, with the subs locked out until the
seniors are paid off. In the event that delinquencies spike,
triggers could fail, causing a Credit Event. While the subs
are already locked out from principal, this would shift the
application of principal in the seniors from pro-rata to
sequential, paying the A1 class first. Once the preceding
class has been reduced to zero, unpaid interest and
principal will be applied sequentially to the next class. To
illustrate the effect of delinquency triggers on cashflows,
we go into further detail with a sample bond in Exhibit
B1.
While trigger timelines and thresholds may vary by deal,
generally Non-QM deals have two tests that need to be met.
Below is an example from a recent deal:
 Delinquency test: average 60++ DQ over the past six
months exceeds a set threshold. Typically 20% in years
1-3, 25% in years 4-5, and 30% thereafter.
 Cumulative net loss test: cumulative net loss has to be
below 2.0% in the years 1-3, 3% in year 4, 6% in year 5
and 8% thereafter.
Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Cashflow Scenario Analysis
In our scenario analysis, we stressed both CPRs and
delinquencies for VERUS 2019-4 using recent market
pricing. Scenarios 1 and 2 represent our base case
prepayment scenarios, with 10 CPR for the next 12 months,
before returning to a long-term rate of 25 CPR. This
assumes that the origination market would more or less
return to normal in a year and borrowers would be able to
refinance. Scenarios 1 and 3 also illustrate a stress case
where DQs ramp up to 30% over the next 6 months, remain
at 30% for 6 months, and then ramp down to 10% over the
following 12 months. While scenario 3 is more of downside
speed scenario, we also included a draconian Subprime
2008-esque scenario with extremely slow speeds and high
DQ/CDRs/Severity for life.
In scenario 1, the deal fails the DQ trigger from month 4 to
19, locking out the A2 and A3 classes from principal in that
period. In this scenario, the bond has a z-spread of roughly
485 bps and a WAL of 2.4 years, while the A2 WAL extends
marginally to 3.3 years. In our second scenario, our base
case prepayment / lower DQ scenario, the deal stays below
its DQ trigger levels, allowing for principal to be paid to the
A2 and A3 classes. Here the A1 class extends slightly, while
earning slightly less spread. However, the A2 WAL
shortens roughly 0.7 years. Scenario 3 is a downside speed

Exhibit B1: Non-QM Trigger Sample Scenarios

VERUS 2019-4 A1 (94.188 $px)

WAC: 6.37 WALA: 8

Cum. Loss/DQ Test Threshold Steps

Scenario 1 Scenario 2 Scenario 3 Crisis Scenario

CPR 10 CPR for 12 mo, then 25 CPR 10 CPR for 12 mo, then 25 CPR 10 CPR 2 CPR

CDR/Severity 2 CDR / 40% Sev 2 CDR / 40% Sev 2 CDR / 40% Sev 20 CDR / 50% Sev

Ramp up to 30% over 6 mo, Ramp up to 10% over 6 mo, Ramp up to 30% over 6 mo,
Ramp up to 30% over 6 mo,
DQ stay at 30% for 6 mo, stay at 10% for 6 mo, stay at 30% for 6 mo,
stay at 30%
ramp down to 10% over 12 mo ramp down to 5% over 12 mo ramp down to 10% over 12 mo

Z-Spread (Swap) 485 469 396 377

WAL 2.37 2.55 4.32 4.08

A2 WAL 3.27 2.61 5.73 8.49

Triggers
DQ
Period DQ DQ DQ DQ
Trigger
1 12.00% 0.00% 0.00% 0.00% 0.00%

2 12.00% 6.00% 2.00% 6.00% 6.00%

3 12.00% 12.00% 4.00% 12.00% 12.00%

4 12.00% 18.00% 6.00% 18.00% 18.00%

5 12.00% 24.00% 8.00% 24.00% 24.00%

6 12.00% 30.00% 10.00% 30.00% 30.00%

9 12.00% 30.00% 10.00% 30.00% 30.00%

12 12.00% 28.18% 9.55% 28.18% 30.00%

15 15.00% 22.73% 8.18% 22.73% 30.00%

18 15.00% 17.27% 6.82% 17.27% 30.00%

21 20.00% 11.82% 5.46% 11.82% 30.00%

24 20.00% 10.00% 5.00% 10.00% 30.00%

Note: Green text represents passed trigger, red text means failed

Source: Intex, Bloomberg, Wells Fargo Securities

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Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

scenario, with higher DQs but a 10 CPR for life – that

assumes the Non-QM lending market remains somewhat
dysfunctional. While the bond fails the DQ trigger from
month 4 to 19, the slower speed causes the A1 to extend to
4.3 WAL, while the spread falls to just under 400 bps.

In the draconian scenario, the A1 still is not broken due to

the substantial CE and the structure. In this scenario, the
bond still has a spread of 380 bps and a 4 year WAL.
However, the A2 bond does extend to 8.5 years,
highlighting the benefit of the trigger lockout for the A1.

Extension More Concern; Top of Stack Attractive

We continue to think Non-QM seniors are well
subordinated, and do not envision them taking losses from
this event. Looking at realized legacy Alt-A losses, it would
take the equivalent of 2006-2007 vintage experience to
breach the single-As in a sample Non-QM deal structure
(Exhibit B2). We don’t think we are close to there yet.

Overall, for the top of the stack, the slower speeds for life
cause the greater concern due to the risk of extension. At
today’s levels, we think the top of the stack looks attractive,
with heavy levels of CE working to reduce concerns of
losses, and the protection afforded by the delinquency
trigger for the A1 in times of stress diverting more principal
to the class.

Exhibit B2: Non-QM CE vs Legacy Alt-A Losses

40%
A1 C E

30% A2 C E
% Cum. Loss

20% A3 C E

10% M1 C E

B1 C E

0%
2004 2005 2006 2007 '04-'07
Alt-A Vintage
Note: Using DRMT 2020-1 deal structure as an example. Legacy Alt-A
losses are a blend of 2/3rds ARM and 1/3rd Fixed.
Source: CPR & CDR Technologies, Bloomberg, Wells Fargo Securities

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Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Appendix B1: Non-QM Higher Risk Concentrations - 2017-18 Issuance by Current Balance
Deal Non-Owner FICO <680 LTV ≥80 DTI >43*

AOMT 2017-1 34.0% 18.1% 30.8% 27.4%

AOMT 2017-2 36.5% 25.5% 40.3% 19.5%

AOMT 2017-3 29.9% 25.2% 47.3% 23.8%

DRMT 2017-1A 15.2% 30.1% 46.7% 27.2%

DRMT 2017-2A 12.2% 32.6% 38.7% 17.7%

DRMT 2017-3A 21.7% 32.2% 48.3% 20.1%

VERUS 2017-1A 7.2% 19.7% 30.3% 20.8%

VERUS 2017-2A 31.1% 29.6% 20.3% 25.4%

AOMT 2018-1 22.2% 25.3% 46.2% 24.2%

AOMT 2018-2 15.0% 26.8% 56.8% 20.1%

AOMT 2018-3 15.9% 22.2% 64.8% 20.8%

ARRW 2018-1 28.0% 5.8% 0.2% 29.9%

COLT 2018-1 14.7% 36.9% 70.2%

COLT 2018-2 12.4% 33.2% 63.8% 49.5%

COLT 2018-3 8.7% 29.5% 67.0% 55.4%

COLT 2018-4 10.1% 20.2% 75.9% 40.4%

DRMT 2018-1A 26.5% 26.5% 37.1% 23.5%

DRMT 2018-2A 30.7% 34.5% 34.9% 25.1%

DRMT 2018-3A 23.4% 33.7% 38.3% 33.3%

DRMT 2018-4A 28.6% 24.3% 45.2% 28.8%

EFMT 2018-1 27.9% 22.8% 29.9% 28.9%

HOF 2018-1 36.7% 9.9% 23.3% 14.3%

HOF 2018-2 35.7% 14.5% 30.8% 20.4%

NRZT 2018-NQM1 30.8% 10.8% 45.3% 21.8%

SGR 2018-1 16.6% 27.5% 39.0% 26.4%

VERUS 2018-1 26.1% 28.5% 26.3% 28.3%

VERUS 2018-2 25.4% 26.1% 21.7% 32.7%

VERUS 2018-3 20.9% 24.3% 30.3% 30.1%

*DTI Data unavailable for COLT 2018-1, COLT 2019-3, HOF 2019-3 and VERUS 2019-4

Sources: CPR & CDR Technologies, Wells Fargo Securities

9
Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Appendix B2a: Non-QM Higher Risk Concentrations - 2019 Issuance by Current Balance
Deal Non-Owner FICO <680 LTV ≥80 DTI >43* Self-Employed**

AOMT 2019-1 17.0% 26.5% 59.1% 26.8% 65.2%

AOMT 2019-2 17.4% 26.3% 63.7% 28.9% 70.0%

AOMT 2019-3 20.2% 30.1% 58.1% 28.3% 69.4%

AOMT 2019-4 18.6% 29.4% 59.3% 29.3% 71.8%

AOMT 2019-5 21.7% 23.6% 58.0% 23.5% 70.2%

AOMT 2019-6 22.3% 22.8% 53.3% 22.9% 68.8%

ARRW 2019-1 38.7% 5.5% 2.8% 25.1% 41.6%

ARRW 2019-2 36.6% 5.3% 6.4% 31.6% 41.5%

ARRW 2019-3 36.3% 6.9% 2.8% 31.1% 45.4%

BHLD 2019-1 53.9% 9.9% 1.8% 8.5% 22.0%

BHLD 2019-2 47.1% 8.8% 5.3% 20.4% 38.4%

BHLD 2019-3 51.5% 24.7% 15.3% 18.1% 57.9%

BRAVO 2019-NQM1 12.4% 21.1% 44.3% 31.6% 30.5%

BRAVO 2019-NQM2 29.1% 18.9% 47.4% 30.1% 49.2%

CMLTI 2019-IMC1 40.5% 8.3% 36.4% 8.4% 68.4%

COLT 2019-1 8.3% 23.8% 76.1% 43.5% 30.9%

COLT 2019-2 6.2% 14.6% 75.1% 41.3% 31.0%

COLT 2019-3 10.2% 20.2% 81.4% 32.6%

COLT 2019-4 11.3% 22.2% 79.2% 40.1% 30.1%

CSMC 2019-AFC1 26.7% 4.4% 16.6% 42.1% 61.6%

CSMC 2019-NQM1 27.4% 14.7% 22.3% 19.8% 45.1%

DRMT 2019-1A 25.3% 31.4% 45.4% 28.7% 61.2%

DRMT 2019-2A 29.5% 33.3% 42.1% 21.9% 59.6%

DRMT 2019-3A 28.1% 30.6% 45.1% 29.3% 55.3%

DRMT 2019-4A 23.1% 30.6% 47.4% 27.8% 60.5%

EFMT 2019-1 29.0% 21.4% 24.2% 31.4% 65.0%

EFMT 2019-2 31.0% 25.2% 27.5% 31.1% 71.2%

GCAT 2019-NQM1 23.6% 8.8% 12.1% 29.4% 59.7%

GCAT 2019-NQM2 36.2% 13.7% 14.1% 19.4% 53.3%

GCAT 2019-NQM3 25.1% 12.7% 18.0% 22.1% 43.2%

*DTI Data unavailable for COLT 2018-1, COLT 2019-3, HOF 2019-3 and VERUS 2019-4
**Self-Employed Data by Balance at Origination
Sources: CPR & CDR Technologies, Wells Fargo Securities

10
Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Appendix B2b: Non-QM Higher Risk Concentrations - 2019 Issuance by Current Balance
Deal Non-Owner FICO <680 LTV ≥80 DTI >43* Self-Employed**

HOF 2019-1 30.8% 12.3% 39.6% 21.7% 66.3%

HOF 2019-2 21.1% 16.2% 45.5% 32.7% 64.5%

HOF 2019-3 14.4% 14.4% 50.4% 73.8%

NRZT 2019-NQM1 25.8% 7.1% 46.6% 25.5% 75.9%

NRZT 2019-NQM2 28.8% 12.7% 46.8% 27.3% 74.4%

NRZT 2019-NQM3 30.8% 12.5% 53.6% 22.4% 71.5%

NRZT 2019-NQM4 29.7% 9.1% 50.8% 22.8% 63.2%

NRZT 2019-NQM5 29.1% 11.2% 49.4% 31.7% 57.5%

RMLT 2019-1 38.4% 33.0% 28.5% 26.1% 56.6%

RMLT 2019-2 33.7% 31.5% 23.5% 30.1% 48.4%

RMLT 2019-3 33.1% 32.8% 27.7% 32.6% 53.8%

SGR 2019-3 13.6% 20.4% 39.2% 29.1% 66.1%

SHMLT 2019-SH1 11.6% 52.8% 40.2% 29.5% 49.0%

VERUS 2019-1 20.4% 24.1% 29.3% 30.4% 72.8%

VERUS 2019-2 26.3% 27.7% 30.5% 29.3% 72.2%

VERUS 2019-3 19.7% 30.5% 33.6% 27.8% 72.2%

VERUS 2019-4 23.7% 24.9% 38.8% 71.3%

*DTI Data unavailable for COLT 2018-1, COLT 2019-3, HOF 2019-3 and VERUS 2019-4
**Self-Employed Data by Balance at Origination
Sources: CPR & CDR Technologies, Wells Fargo Securities

11
Non-Agency RMBS Weekly
March 27, 2020
GSEs Introduce a New Payment Deferral Program
Continuing their response to the COVID-19 outbreak, both
GSEs introduced a payment deferral option, as a new loss
mitigation solution to borrowers who became delinquent
due to a short-term hardship that has since been resolved.
The release was on Wednesday, but the deferral option
program will not be available until July 2020 (FN: link |
FH: link). We explore some of the details below.
Key Takeaways
1. Because this is not a loan modification, the loan does
not need to be bought out of a pool. If the loan remains
in the pool, prepayment speeds should be slower as
borrowers are hesitant to move and/or refi, as the
forborne amount would become payable.
2. In terms of cash flow implications to CRT, a payment
deferral in itself would not lead to losses to the deal. If
anything, this is an extra step that servicers can
consider before deciding on extension, rate reduction,
or principal forbearance (the latter two would lead to
modification losses).
3. The direct cash flow effect to CRT is that at most two
months of scheduled principal would be deferred to
the end, so the extension should be minimal. CRT
bond interest is covered by the GSEs themselves or the
Gfee IO-strip in the deals, so this new deferral option
should not affect coupon payments. Overall, we see
this as a net positive for CRT, as it slightly reduces the
odds of a more material modification, by addressing a
situation where a borrower has a short-term disrupted
income stream but could not catch up otherwise.
Purpose
Per the release, the payment deferral is designed to provide
relief to eligible borrowers who have the financial capacity
to resume making their monthly payments, but who are
unable to afford a full reinstatement or the additional
monthly contributions required by a repayment plan. The
program will bring a borrower current by deferring
delinquent principal and interest, creating a non-interest
bearing forborne balance that will become due at the
earlier of the mortgage maturity date, payoff date, or upon
transfer or sale of the mortgaged premise. The remaining
mortgage term, interest rate schedule, payment schedule
and maturity date will all remain unchanged. Also see
FAQs (link).
12
WELLS FARGO SECURITIES
STRUCTURED PRODUCTS RESEARCH
Workout Waterfall
Reading through the announcement, the payment deferral
option should be viewed as a stop-gap solution, after a
borrower has been evaluated for or has gone through other
workout options, but before a borrower goes to a more
intensive workout option, like a modification. Here is an
example of the aforementioned waterfall:
 Temporary forbearance
 Reinstatement
 Repayment Plan
 Payment Deferral Plan (new)
 Modifications (like term extension, recap and extend,
Flex mod)
General Eligibility
Below are a handful of criteria considered for the payment
deferral option. The list is not meant to be exhaustive.
 At least 12 months of seasoning.
 As of the date of evaluation, the mortgage loan must be
30 or 60 days delinquent (i.e., the borrower is not past
due for more than two full monthly contractual
payments); and such delinquency status must have
remained unchanged for at least three consecutive
months, including the month of the evaluation.
 No prior payment deferrals.
 Not being evaluated for, or currently participating in,
other types of workout options and cannot have failed
a non-disaster modification trial period within the
prior 12 months.
 The hardship has been resolved.
 The borrower has the financial capacity to continue
making the existing contractual monthly mortgage
payment and does not require a payment reduction.
 A repayment plan or full reinstatement of the
mortgage is not a viable option to cure the
delinquency.
Implementation, Solicitation and Incentives
Servicers can start evaluating borrowers for the payment
deferral option in July 2020, with implementation
mandatory by January 2021. Per the announcement,
servicer solicitation is allowed. Also, the servicer is eligible
for a $500 incentive fee upon completion of a payment
deferral. Furthermore, the servicer can request
reimbursement for certain expenses related to the deferral.
Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Data Tracker: Trading Activity, Supply and Technical Drivers

Exhibit T1: Non-Agency RMBS Spreads Overview1
Change From:
Sector Product Rating WAL 26-Mar 52 Wks Wide Tights
1 Week 4 Weeks 12 Weeks 52 Weeks
Median s (1 yr) (1yr)
Subprime IG 1-4yr 250 50 175 180 180 180 0 190
Subprime IG 10 yr 500 150 375 390 400 390 0 405
Subprime Non-IG 6-7 yr 500 125 355 360 385 360 0 390
Legacy
Prime/Alt-A PT IG <3 yr 350 25 260 260 275 275 0 280
Prime/Alt-A PT Non-IG 5-7 yr 475 50 325 330 345 345 0 360
POA - Super Senior NR 6-7 yr 500 150 355 365 375 378 0 395
Curr. Coupon 3.5% AAA 5 yr 5.500 0.500 4.500 4.438 4.438 4.438 0.000 4.688
Curr. Coupon 4.0% AAA 4 yr 5.500 0.500 3.250 3.625 4.000 3.969 0.000 4.500
FSEQ AAA 3yr 6.250 1.250 3.875 4.000 4.250 4.250 0.000 4.938
Prime 2.02 Senior Mezz AAA 5yr 6.000 1.000 4.675 4.437 4.437 4.406 0.000 4.750
LCF AAA 11yr 285 35 160 140 146 146 0 170
AA Sub AA 8yr 550 250 410 400 405 405 0 426
Single-A Sub A 8yr 650 300 485 480 485 485 0 506
Class A AAA 5 yr 300 0 206 208 208 208 0 214
Class B AA 5 yr 450 100 330 333 335 336 0 340

SFR Class C A 5 yr 550 150 417 419 419 419 0 427

(Floating) Class D BBB 5 yr 625 175 480 475 475 475 0 482
Class E BBB- 5 yr 700 200 500 505 505 505 0 512
Class F BB 5 yr 800 250 575 580 580 580 0 590

NPL/ NPL Class A1 NR 1-2yr 10.00% 4.50% 7.00% 6.375% 6.500% 6.500% 0.000% 7.125%
RPL3 RPL Class A1 AAA 3-4yr 325 25 250 235 240 240 0 255
Expanded Prime AAA 3-4yr 400 0 240 245 245 245 0 300
Non-Prime Non-QM AAA 2yr 500 150 420 403 405 405 0 422
1: Spreads quoted as discount margin (DM) to LIBOR unless noted otherwise
2: Prime 2.0 Pricing conventions: Current coupon pass throughs are quoted on a price basis as points back of comparable coupon TBAs. FSEQ bonds are
quote to FNMA 15yr pass throughs. LCF, AA and A rated bonds are quoted to swaps
3: NPL bonds are quoted on a yield basis
Note: Due to the current nature of the CRT market, please refer to the attached price history instead.
Source: TRACE, Wells Fargo Securities

13
Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Exhibit T2: Non-Agency RMBS Trading and BWIC Exhibit T3: Non-Agency RMBS Primary Dealer
Volume Net Positions
20 6 12.0
Volume of Trades ($ bn)

BWIC Volume ($ bn)

15
4 10.0

$ billion
10

2 8.0
5

0 0
6.0
Apr-19 Jul-19 Oct-19 Jan-20 Apr-20
Sep-17 May-18 Jan-19 Sep-19
IG Non-IG BWIC
2017 2018 2019 2020

Source: TRACE, Wells Fargo Securities Source: NY Federal Reserve, Wells Fargo Securities

Exhibit T4: Corporate OAS (YTD) Exhibit T5: CMBS AAA and BBB Spreads (YTD)
450 1200 350 1250

350 1000
Spread (bps)

900 250
OAS (bps)

250 750

600 150
150 500

50 300 50 250
Aug-19 Nov-19 Feb-20 Aug-19 Nov-19 Feb-20
Conduit CMBS AAA LCF (LHS)
IG Corp. OAS (LHS) HY Index OAS (RHS)
Conduit CMBS BBB (RHS)
Source: Yield Book, Wells Fargo Securities Source: Wells Fargo Securities

14
Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

CRT Trading Activity

Exhibit T6: CRT Weekly Volume Exhibit T7: CRT 20 Day 2019 Volume by Tranche

3,000 Weekly Gr Vol 2020 Avg 600

2019 Avg
500
2,500
Gross Volume ($mm)

Gross Volume ($mm)

400
2,000
300
1,500
200

1,000
100

500 0
28 3 5 9 11 13 17 19 23 25
0 Date in Feb/Mar
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20
F/MCF LCF B1 B/B2
Note: TRACE caps trade size reporting at $5mm. For trades above Note: TRACE caps trade size reporting at $5mm. For trades above
$5mm, we count them as $8mm for aggregation purposes. $5mm, we count them as $8mm for aggregation purposes.

Source: TRACE, Wells Fargo Securities Source: TRACE, Wells Fargo Securities

Exhibit T8: Credit Risk Transfer – Exhibit T9: Credit Risk Transfer –
First/Middle Cash Flow Spreads M2 and B1 Spreads
600 1500

500 1300

1100
400
DM (bps)

DM (bps)

900
300
700

200
500

100
300

0 100
Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19

STACR M1 STACR Old M2 M1 / CAS M1 LLTV LCF HLTV LCF LLTV B1 HLTV B1

Source: Wells Fargo Securities Source: Wells Fargo Securities

15
Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Exhibit T10: Credit Risk Transfer – Seasoned Last Cash Flow Nominal Spreads

1600

1400

1200

1000
DM (bps)

800

600

400

200

0
Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Feb-19 Jun-19 Oct-19 Feb-20

STACR 2014 Vintage M3 STACR 2015 Vintage M3 STACR 2016 Vintage M3

CAS 2014 Vintage M2 CAS 2015 Vintage M2 CAS 2016 Vintage M2

Source: TRACE, Wells Fargo Securities

Exhibit T11: Legacy RMBS Spreads

600

500

400
DM (bps)*

300

200

100

0
Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19
Subprime IG (5yr) Subprime IG (10yr) Subprime Non-IG (6-7yr)
Option ARM SSNR (6-7yr) Prime/Alt-A: Float IG (<3yr) Prime/Alt-A: Fixed Non-IG (5-7yr)
Prime/Alt-A: Float Non-IG (5-7yr)
*All legacy spreads quoted as discount margin (DM), except for fixed CMO, which are quoted versus swaps
Source: Wells Fargo Securities

16
Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Exhibit T13: Fannie CK Minus Prime 2.0 SSnr Px

Exhibit T12: Prime 2.0 Pricing
Diff
6.5
1.5 1.5
CC 3.5
5.5
CC 4.0
Points Back of TBA

4.5 1.0 1.0

CK Minus 2.0 Px Dif f

3.5

0.5 0.5
2.5

1.5
0.0 0.0
Jun-17 Mar-18 Dec-18 Sep-19
0.5
Jun-17 Mar-18 Dec-18 Sep-19
-0.5 -0.5
CC 3.5 AAA (5yr) CC 4.0 AAA (4yr)
FSEQ2 AAA (3yr) Snr Mezz AAA (5yr)

Source: Wells Fargo Securities Source: Wells Fargo Securities

Exhibit T14: NPL Pricing Yields Exhibit T15: Rated RPL Spreads
10.5% 1000 400 400

9.5%
800
8.5% 300 300
Spread to Swap (bps)

7.5%
600
Yield

6.5% 200 200

400
5.5%

4.5%
200 100 100

3.5%

2.5% 0
Jun-17 Mar-18 Dec-18 Sep-19 0 0
Jun-17 Mar-18 Dec-18 Sep-19
A1 Yield (LHS) A1 Spread to Swap (RHS) RPL A1 AAA NPL-RPL Spread
Source: Wells Fargo Securities Source: Wells Fargo Securities

17
Non-Agency RMBS Weekly WELLS FARGO SECURITIES
March 27, 2020 STRUCTURED PRODUCTS RESEARCH

Exhibit T16: Expanded Prime / Non-QM Spreads Exhibit T17: SFR Spreads (Floating Rate)
550 550 1000 1000
Spread to Swap (Nominal, bps)

450 450 800 800

DM (bps)
600 600
350 350

400 400
250 250

200 200
150 150

0 0
Sep-17 Jun-18 Mar-19 Dec-19
50 50
May-18 Nov-18 May-19 Nov-19 Class A Class B Class C
Class D Class E Class F
Expanded Prime SSNR PT Non-QM A1 Snr
Source: Wells Fargo Securities Source: Wells Fargo Securities

Appendix T1: Tranches Referenced for CAS and STACR Spread Levels
Vintage Cohort Reference Bond

CAS 2014 Vintage M2 CAS 2014-C03 1M2

CAS 2015 Vintage M2 CAS 2015-C03 1M2

CAS 2016 Vintage M2 CAS 2016-C02 1M2

STACR 2014 Vintage M3 STACR 2014-DN4 M3

STACR 2015 Vintage M3 STACR 2015-DNA3 M3

STACR 2016 Vintage M3 STACR 2016-DNA1 M3

Source: Wells Fargo Securities

18
DISCLOSURE APPENDIX
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SECURITIES: NOT FDIC-INSURED * NOT BANK-GUARANTEED * MAY LOSE VALUE


George Bory, CFA, Managing Director
Structured Products Research
Vipul Jain, Ph.D., CFA, Managing Director
Lea Overby, Managing Director
David Preston, CFA, Managing Director
Randy Ahlgren, CFA, Director
Peter Zhou, Director
Gary Zhu, CFA, Director
Ryan Brinkoetter, CFA, Vice President
Philip Hong, CFA, Vice President
Hadi Afrasiabi, Ph.D., Associate
Rachel Bilskie, Associate
Sam Cecil, Associate
Powell Eddins, Associate
Michael Nunn, Associate
Bloomberg
Research Website
STRUCTURED PRODUCTS RESEARCH
Head of Fixed Income Research
Head of Residential Mortgage Research
Head of CMBS and Real Estate Research
Head of CLO and ABS Research
Residential Mortgage Research
Research Analytics
CMBS and Real Estate Research
ABS Research
Residential Mortgage Research
Residential Mortgage Research
CLO and ABS Research
Residential Mortgage Research
CLO and ABS Research
CMBS and Real Estate Research
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george.bory@wellsfargo.com (212) 214-8051
vipul.jain@wellsfargo.com (212) 214-5738
lea.overby@wellsfargo.com (212) 214-5046
david.preston@wellsfargo.com (704) 410-3080
randy.ahlgren@wellsfargo.com (704) 410-3086
peter.zhou@wellsfargo.com (704) 410-3341
gary.zhu@wellsfargo.com (212) 214-8183
ryan.brinkoetter@wellsfargo.com (704) 410-3089
philip.hong@wellsfargo.com (212) 214-8721
hadi.afrasiabi@wellsfargo.com (704) 410-3172
rachel.bilskie@wellsfargo.com (704) 410-2697
samuel.m.cecil@wellsfargo.com (704) 410-6082
powell.eddins@wellsfargo.com (704) 410-1818
michael.nunn@wellsfargo.com (704) 410-3088
WFRE
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