Underlying Housing Market and Regulatory/Monetary/ Fiscal Support

Rising home prices are a strong fundamental tailwind for mortgage credit and RMBS securities and throughout 2021, the housing market has continued to outperform expectations with strong price appreciation, now running at over 15% year over year nationally. With inventory at record low levels and demand far outpacing supply thanks in part to continued good affordability from low rates and increasing incomes as well as a pandemic- led shift in housing preferences, we expect the positive trend in home prices to continue throughout 2021 and into 2022. New housing supply and construction are still well below current demand and have remained that way since the last recession well over ten years ago, further fueling the current imbalance. Even though home builders’ activity has increased since the pandemic, it will take years for supply to increase and may well remain below the expected level of demand.

In addition, since the pandemic began, the U.S. consumer has benefited from multiple rounds of stimulus, extended unemployment benefits, and eviction and foreclosure moratoriums, which have provided lifelines to borrowers during the worst parts of the COVID crisis. The FHFA’s (Fannie Mae’s and Freddie Mac’s regulator) forbearance programs, which were initially 12 months in length until being extended to 18 months, also provided significant relief to more distressed borrowers by allowing them to pause their mortgage payments while the economy recovered and began to gradually reopen. Of the borrowers that opted into these forbearance programs, on average over 70% have now cured or prepaid their loans.

Another recent example of accommodative policy action occurred in April when the FHFA announced a new program aimed at the cohorts of borrowers that were unable to take advantage of historically low mortgage rates. The RefiNow and RefiPossible programs target higher debt-to-income (DTI) borrowers, who may have lost income as a result of the crisis, to refinance into a new more affordable mortgage.

Overall, strong home price appreciation coupled with continued public policy support, stimulus, extended unemployment benefits and forbearance programs have been a significant credit positive for the RMBS and mortgage credit sector despite the lack of any direct Fed programs specifically targeting RMBS.

DISCLOSURES:

Opinions expressed in this document represent the views of Semper Capital Management, L.P., are valid only as of the date indicated, and are subject to change without notice. There can be no guarantee that any of the opinions expressed in this document or any underlying position will be maintained at the time of this presentation or thereafter. We are not soliciting or recommending any action based on this material. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any securities.