If it weren’t for the capital/secondary markets providing liquidity for the primary markets, mortgage rates would be much higher. By the way, through thick and thin the Agency mortgage-backed security market has been just fine, and liquidity is superb. Let’s see what some of the issues are that originators should be cognizant of. They don’t have to know every detail, but awareness is good!
First, lots of servicers are nervous about having billions of dollars of adjustable rate mortgages without their index: the London Interbank Offered Rate. The Alternative Reference Rates Committee, established by the Federal Reserve and other US agencies, has recommended voluntary fallback language for new contracts that reference Libor for “reducing the risk of serious market disruption in the event that Libor is no longer usable”.
Agency action in the capital markets
Given his past stance of Freddie & Fannie, many were surprised when so many industry groups backed Mark Calabria becoming the next FHFA Director. Yet “insiders” say we can look for some form of GSE capital retention but also continued support for GSE (government sponsored enterprises) Credit Risk Transfers (CRTs), which should be a tailwind for industry participants like PennyMac).
Freddie & Fannie continue to move forward with initiatives that aren’t directly reliant on political decisions, like billions of dollars of transferring credit risk. Dan Fichtler, Director of Housing Finance Policy, for the Mortgage Bankers Association observes, “We continue to be encouraged by the progress the GSEs are making with respect to their CRT programs. For the STACR and CAS offerings in particular, it’s clear that they’ve turned the corner to become better-understood, more-liquid securities, which is increasing investor demand and contributing to tighter spreads. Another very positive development is the decision by both GSEs to issue their STACR and CAS securities as REMICs, which should allow greater investment by REITs.”
Loan originators should know that transferring credit risk away from taxpayers to willing buyers help rates for their borrowers. Let’s see what Fannie’s been up to in the capital markets.
On April 11, Fannie Mae began marketing its eleventh sale of reperforming loans, approximately 21,400 loans, having an unpaid principal balance of approximately $3.3 billion, as part of the company’s ongoing effort to reduce the size of its retained mortgage portfolio. Reperforming loans were previously delinquent but are performing again because payments on the mortgages have become current with or without the use of a loan modification. The terms of Fannie Mae’s reperforming loan sale require the buyer to report on loss mitigation outcomes and offer loss mitigation options designed to be sustainable to any borrower who may re-default within five years following the closing of the reperforming loan sale. Any reporting requirements cease once a loan has been current for twelve consecutive months after the closing of the reperforming loan sale. Interested bidders can register at http://www.fanniemae.com/portal/funding-the-market/npl/index.html. Fannie Mae will also post information about specific pools available for purchase on that page. Bids are due on May 7, 2019.
Fannie Mae priced its fourth Multifamily DUS REMIC in 2019 totaling $820.9 million under its Fannie Mae Guaranteed Multifamily Structures (GeMS) program on April 9, 2019. The geographic distribution was highest in CA (16.5%), TX (12.4%), NY (10.8%) and the average LTV of the loans was 64.7%. This second GeMS deal used the A3 structure to create a more call-protected tranche, and there was high demand for the near par, fixed-coupon A2 tranche in a market with little par paper to offer. All classes of FNA 2019-M5 are guaranteed by Fannie Mae with respect to the full and timely payment of interest and principal. Class A1 had an original face of $51.8 million, weighted average life of 5.89 years, a fixed coupon of 3.009%, and an offered price of 100.99. Class A2 had an original face of $579.2 million, weighted average life of 9.60 years, a fixed coupon of 3.273%, and an offered price of 101.49. Class A3 had an original face of $190.0 million, weighted average life of 9.78 years, a fixed coupon of 3.294%, and an offered price of 101.99.
On April 9, Fannie Mae priced its third credit risk transfer transaction of the year, Connecticut Avenue Securities (CAS) Series 2019-R03, an $857 million note offering that represents Fannie Mae’s fourth CAS REMIC transaction. CAS is Fannie Mae’s benchmark issuance program designed to share credit risk on its single-family conventional guaranty book of business, and Fannie will return to the market with a high-LTV loan transaction at the end of June (CAS 2019-R04). The reference pool for this CAS Series 2019-R03 consisted of close to 89,000 single-family mortgage loans with an outstanding unpaid principal balance of approximately $21 billion with loan-to-value ratios of 60.01 percent to 80.00 percent acquired from May through November 2018. The loans included are fixed-rate, generally 30-year term, fully amortizing mortgages. Fannie Mae will retain a portion of the 1M-1, 1M-2, and 1B-1 tranches in order to align its interests with investors throughout the life of the deal. Fannie Mae will retain the full 1B-2H first loss tranche. Pricing is as follows. Class 1M-1 is $204.126 million with an S&P/Morningstar rating of BBB+ sf / A and priced at 1-month LIBOR plus 75 bps. Class 1M-2 is $500.109 million with a rating of B+ sf / BBB- and a price of 1-month LIBOR plus 215 bps. Class 1B-1 is $153.095 million, unrated, and priced at 1-month LIBOR plus 410 bps. With the completion of this transaction, Fannie Mae will have brought 33 CAS deals to market, issued $39 billion in notes, and transferred a portion of the credit risk to private investors on more than $1.2 trillion in single-family mortgage loans. CAS REMIC notes are issued by a bankruptcy-remote trust. The amount of periodic principal and ultimate principal paid by Fannie Mae is determined by the performance of a large and diverse reference pool.
On April 4, Fannie Mae announced the completion of its first and second Credit Insurance Risk Transfer (CIRT) transactions of 2019, covering $29.7 billion in unpaid principal balance of 21-year to 30-year original-term, fixed-rate loans previously acquired by the company. CIRT 2019-1 and 2019-2 are part of Fannie Mae’s ongoing effort to reduce taxpayer risk by increasing the role of private capital in the mortgage market. To date, Fannie Mae has acquired about $8.9 billion of insurance coverage on $345 billion of single-family loans through the CIRT program.
Twenty insurers and reinsurers provided coverage on the largest combined pool of loans ever acquired through CIRT at one time, and these two transactions marked the first time that the CIRT structure has covered the modification costs related to loan workouts. In CIRT 2019-1, which became effective February 1, 2019, Fannie Mae will retain risk for the first 60 basis points of loss on a $11.8 billion pool of single-family loans with loan-to-value ratios greater than 60 percent and less than or equal to 80 percent. If the $70.6 million retention layer is exhausted, reinsurers will cover the next 325 basis points of loss on the pool, up to a maximum coverage of approximately $382 million. With CIRT 2019-2, which also became effective February 1, 2019, Fannie Mae will retain risk for the first 60 basis points of loss on a $17.9 billion pool of single-family loans with loan-to-value ratios greater than 80 percent. If the $107 million retention layer is exhausted, reinsurers will cover the next 325 basis points of loss on the pool, up to a maximum coverage of approximately $582 million.
Coverage for these deals is provided based upon actual losses for a term of 10 years. The covered loan pool for the CIRT 2019-1 and CIRT 2019-2 transactions consist of fixed-rate loans that were acquired by Fannie Mae from April 2018 through November 2018. A summary of key deal terms, including pricing, for these new and past CIRT transactions can be found at http://www.fanniemae.com/resources/file/credit-risk/pdf/cirt-deal-pricing-information.pdf. Depending on market conditions, Fannie Mae expects to continue coming to market with CIRT and CAS deals that allow private capital to gain exposure to the U.S. housing market.
Back in early March Fannie Mae priced the $1 billion Connecticut Avenue Securities (CAS) Series 2019-R02 note offering, its second credit risk transfer transaction of the year and third CAS REMIC transaction. CAS is Fannie Mae’s benchmark issuance program designed to share credit risk on its single-family conventional guaranty book of business. The transaction was met with high demand and including several first-time participants, creating demand for the next deal, CAS 2019-R03, another low-LTV transaction, at the end of March. The reference pool for CAS Series 2019-R02 consists of more than 107,000 single-family mortgage loans with an outstanding unpaid principal balance of approximately $27 billion. The reference pool will include one group of loans comprised of collateral with loan-to-value ratios of 60.01 percent to 80.00 percent acquired from May through September 2018. The loans included in this transaction are fixed-rate, generally 30-year term, fully amortizing mortgages and were underwritten using rigorous credit standards and enhanced risk controls. Fannie Mae will retain a portion of the 1M-1, 1M-2, and 1B-1 tranches in order to align its interests with investors throughout the life of the deal. Fannie Mae will retain the full 1B-2H tranche. Class 1M-1 at $200.48 million, will be priced at 1-month Libor +85 bps and is expected to receive a BBB+ sf / A rating. Class 1M-2 at $613.99 million, will be priced at 1-month Libor +230 bps and is expected to receive a B+ sf / BBB- rating. Class 1B-1 at $187.96 million, will be priced at 1-month Libor +415 bps and will not be rated. Fannie Mae’s CAS program is the most actively traded credit risk transfer product in the market with 32 CAS deals brought to market since the program began. Fannie Mae has issued $38 billion in notes and transferred a portion of the credit risk to private investors on over $1.2 trillion in single-family mortgage loans as part of the CAS program.
Non-QM? Sure thing!
On April 23, Verus Mortgage Capital (VMC) finalized a $372 million residential mortgage-backed securities transaction (2019-INV1), the tenth for the non-QM correspondent investor, comprised of 976 loans with an average balance of $380k, 63 percent LTV, and 727 FICO. 2019-INV1 was VMC’s largest investor loan transaction to date and the third transaction issued by Verus that was backed by non-owner-occupied rental loans. VMC purchases loans in all 50 states and the District of Columbia and focuses solely on the non-agency market, offering correspondent lenders a wide range of home financing products for credit worthy borrowers. Verus offers residential non-QM, investor rental and fix and flip loan programs and has purchased in excess of $5 billion in expanded, non-agency loans since its inception. You can learn more about VMC’s investor products by visiting www.verusmc.com.
(Thanks to California’s Gary E. for sending this oldie but goodie.)
A woman brought a very limp duck into a veterinary surgeon. As she laid her pet on the table, the vet pulled out his stethoscope and listened to the bird’s chest.
After a moment or two, the vet shook his head and sadly said, “I’m sorry, your duck, Cuddles, has passed away.”
The distressed woman wailed, “Are you sure?”
“Yes, I am sure. Your duck is dead,” replied the vet.
“How can you be so sure?” she protested. “I mean you haven’t done any testing on him or anything. He might just be in a coma or something.”
The vet rolled his eyes, turned around and left the room. He returned a few minutes later with a black Labrador Retriever. As the duck’s owner looked on in amazement, the dog stood on his hind legs, put his front paws on the examination table and sniffed the duck from top to bottom. He then looked up at the vet with sad eyes and shook his head.
The vet patted the dog on the head and took it out of the room. A few minutes later he returned with a cat. The cat jumped on the table and also delicately sniffed the bird from head to foot. The cat sat back on its haunches, shook its head, meowed softly and strolled out of the room.
The vet looked at the woman and said, “I’m sorry, but as I said, this is most definitely, 100% certifiably, a dead duck.”
The vet turned to his computer terminal, hit a few keys and produced a bill, which he handed to the woman.
The duck’s owner, still in shock, took the bill. “$1,500!” she cried,”$1,500 just to tell me my duck is dead!”
The vet shrugged, “I’m sorry. If you had just taken my word for it, the bill would have been $20, but with the Lab Report and the Cat Scan, it’s now $1,500.”
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