Feb. 15: Letters on warehouse lending, non-bank lenders; Fannie’s results & capital markets activities

It is important to keep things in perspective. A loan officer will grouse about a price of a non-QM loan being .250 worse than a competitor’s. But Australia’s bush fires burned an estimated 72,000 square miles, the size of South Dakota, killing at least 34 people and an estimated one billion animals. (The photos of the animals were horrific.) The death toll of the coronavirus hit 1,400 with over 60,000 cases around the globe.

That noted, I receive plenty of emails, and received this letter of admonition this week. “Rob, you should stick to mortgage news. I know that others worry about politics, that our justice system is subject to presidential influence, or that the environment may be changing [editor’s note: near 70 degrees in Antarctica?]. Your readers should remember that rates are great, pipelines are full, and companies are off to a great start of the year. Those are the things that matter.”

And there you have it, although so much of what happens in the world, and the people in it, touches our business. On to mortgage topics.

Regarding the question of whether or not all warehouse lenders require audited financials, I received this note from David Frase, the President of Mortgage Warehouse Lending at Simmons Bank. “Simmons Bank is a $20 billion publicly-traded financial institution who does not require audited financials from its warehouse clients. We do not buy loans from our clients nor is our pricing out of market. When our collateral is underwritten by a valid, approved takeout investor prior to funding, we believe the risk of incorrect financial statements is sufficiently mitigated. But this is not a ‘state asset’ program, either. The cash portion of any balance sheet must be supported by bank or brokerage statements at application and annual renewal. If our client decides they want to underwrite their own files, audited financials and more liquidity will be required. I have been a warehouse lender working happily in this ‘non-del’ market for 28 years and I pray some will attest that I am reputable. This rapidly growing segment of the market is not for everyone. It requires patience, a careful hand at the tiller, and really strong people to execute the strategy.”

Concerning general business conditions I was emailed this note from West Virginia. “Rob, we talk constantly about where to invest our time and money. As a small Independent Mortgage company, we cannot afford to make financial mistakes. My personal opinion is that we have to invest in technology and support staff (part-time, full-time, task specific), not more loan officers. Sure, we have to grow, but over the last 20 years, I literally grew my competition after I created a Top 10 Unit Team for Wells Fargo in the early 2000s. Everyone becomes a rocket scientist with success; so, interestingly, I’ve been waiting for the opportunity of a changing landscape to evolve and adapt, because I’m confident the old way of doing things and business plans are not going to succeed and neither will my competition (my old policies and procedures won’t work as well.

“And they can’t copy what I am doing, because I’m not sharing it. Stealth mode to everyone except my Clients. 1:1 marketing). Maybe my (Ego) thinking is wrong, but maybe not. That is the fun of our industry – to try and see. An important point I want to make also, is that we just need our ‘share’ of the market. My standard and quality of life has improved by not carrying a large team. The tricky part of our industry is that it is a volume-based business so, at a certain point, more is needed, but we are finding technology the great equalizer.

 

“I think you will enjoy the email I just sent out this morning to my Realtors: Did you realize that Realtor.com isn’t owned by NAR? Whaaat!? The real estate listing website is operated by News Corporation, a subsidiary of Move, Inc. I had for years just assumed the National Association of Realtors (NAR) owned it. The site launched as the Realtor Information Network in 1995, serving as a closed network for members of the NAR. It relaunched in 1996 as a public website displaying property listings. Since then, Realtor.com claims to have become the largest website in the United States for real estate listings, and in 2016 was valued at $2.5 billion by Morgan Stanley. So, NAR and Realtors do not own their own website. (Dramatic Pause) Why would NAR abdicate control of their most important assets – listings and its Realtor base? NAR is literally paying someone for the information they provided to them for free. It’s the same trick banks did with ATM machines, you have the privilege to be a bank teller in order to get your own money out, while being charge $3.00 for said privilege.

 

“What does this have to do with Zillow getting their New York real estate brokerage? Well, it is another example of the erosion of Realtors position in the marketplace. For years Realtors stressed the importance of how to pronounce the word, Realtor, when they should have been protecting their domain (online and offline) and Brand name in Realtor.com. iBuyers have been assaulting the real estate market without a comprehensive (now defensive) plan in place by NAR. Zillow says that they will have a licensed brokerage in every state by the end of the year to do “nontraditional” real estate. Well, that is Internet speak for “disintermediation”, which means the reduction in the use of intermediaries between producers and consumers, for example, an owner selling their home directly to a buyer without a Realtor.

 

“What is your Board of Realtors doing about it? What are you doing about it? Why is an Independent Mortgage Advisor sharing this information with you? Because we are all holding hands down this aisle and only a few of us are going to make it to the end. We need to adapt to the new realities and threats in our marketplace.”

Fannie Mae Activity in the capital markets & transferring risk

It is important for LOs to know that without investor interest in the product that the product the LO manufactures, the process would cease. So it is good to know that the Agencies (Fannie, in this case) is up to since they are the end buyer of the lion’s share of mortgage originations. And since F&F can now retain their earnings, knowing if they’re making money is important as well.

On February 13, Fannie Mae reported its fourth quarter and full-year 2019 financial results reflecting solid financial performance through strong business fundamentals and stable single-family and multifamily guaranty books. Fannie Mae reported 2019 net income of $14.2 billion and Q4 2019 net income of $4.4 billion. Fannie Mae’s net worth increased to $14.6 billion as of December 31, 2019, as the company continues to retain quarterly earnings and restore its capital base. Based on the current agreement with the U.S. Department of the Treasury and the Federal Housing Finance Agency (FHFA), the company may retain quarterly earnings until its net worth reaches $25 billion. Fannie Mae provided more than $650 billion in liquidity to the mortgage market in 2019 through the financing of more than 3 million home purchases, refinances, and rental units. Fannie Mae was the largest issuer of single-family mortgage-related securities in the secondary market during 2019 with an estimated market share of single-family mortgage-related securities issuances of 37 percent. Fannie Mae provided $70 billion in multifamily financing in 2019, which enabled the financing of 726,000 units of multifamily housing. More than 90 percent of the multifamily units the company financed in 2019 were affordable to families earning at or below 120 percent of the area median income, providing support for both affordable and workforce housing.

 

Fannie Mae also continued its ongoing capital management and risk reduction efforts in 2019. Fannie Mae made changes to its Single-Family credit risk transfer structures in 2019, increasing the company’s capital relief and reducing the company’s risk. Fannie Mae also began obtaining credit protection on single-family reference pools containing seasoned loans, increasing the percentage of the company’s book covered by credit risk transfer, reducing the company’s capital requirements, and further reducing risk. Fannie Mae also enhanced its risk transfer capabilities through the company’s first Multifamily Connecticut Avenue Securities transaction in the fourth quarter of 2019, while remaining committed to lender risk-sharing through its Delegated Underwriting and Servicing program. These and other multifamily credit enhancements through 2019 have reduced the company’s conservatorship capital requirement for credit risk on multifamily loans acquired in 2018 by more than 70 percent. Fannie Mae’s retained mortgage portfolio decreased to $153.6 billion as of December 31, 2019 from $179.2 billion as of December 31, 2018, due primarily to a decrease in the company’s loss mitigation portfolio driven by sales of reperforming loans.

Fannie Mae’s Green mortgage-backed securities (MBS) issuances, which can be backed by green certified properties or properties targeting a significant reduction in energy or water consumption, increased 13 percent to $22.8 billion in 2019, totaling $75 billion since the program’s inception in 2010.

Fannie Mae also broadened the sources of liquidity available to the market in 2019 with its Multifamily Credit Risk Transfer (MCRT) program, which mitigates credit risk by transferring a portion of its risk to reinsurers and investors and increasing the role of private capital in the multifamily market. Multifamily Affordable Housing volume rose over 20 percent to $7.2 billion, which Fannie Mae would say represents a commitment to the preservation of affordable housing for families across the country.

Fannie Mae priced Connecticut Avenue Securities (CAS) Series 2020-R01, a $1.03 billion note offering that represents Fannie Mae’s first CAS REMIC transaction of 2020. CAS is Fannie Mae’s benchmark issuance program designed to share credit risk on its single-family conventional guaranty book of business. The reference pool for CAS Series 2020-R01 consists of approximately 105,000 single-family mortgage loans with an outstanding unpaid principal balance of approximately $29 billion.

 

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. Fannie Mae will retain a portion of the 1M-1 ($303.1 million offered amount, 1-month LIBOR plus 80 bps, expected BBB-sf Fitch/BBB+ (sf) KBRA ratings), 1M-2 ($523.5 million offered amount, 1-month LIBOR plus 205 bps, expected Bsf Fitch/BB (sf) KBRA ratings), and 1B-1 ($206.6 million offered amount, 1-month LIBOR plus325 bps, class will not be rated) 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.

 

With the completion of this transaction, Fannie Mae will have brought 39 CAS deals to market, issued $45 billion in notes, and transferred a portion of the credit risk to private investors on close to $1.5 trillion in single-family mortgage loans, measured at the time of the transaction. Fannie Mae’s single-family credit risk transfer programs have now transferred a portion of credit risk on over $2 trillion in underlying loans since 2013. Fannie Mae plans to return to market in mid-February with a high-LTV CAS deal. For more information on individual CAS transactions, visit our credit risk transfer website.

Fannie Mae priced its first Multifamily DUS REMIC in 2020 totaling $873 million under its Fannie Mae Guaranteed Multifamily Structures (GeMS) program on January 22, 2020. FNA 2020-M1 is the first Green Fannie Mae GeMS issuance of 2020. This is the twelfth GeMS issuance backed by Green MBS collateral, which brings total Green GeMS issuance to $9.9 billion. Collateral was composed of 28 Fannie Mae Green DUS MBS primarily in Nevada (35 percent), Florida (34 percent), and New Jersey (7 percent) with a weighted average LTV of 69 percent and a weighted average debt service coverage ratio (DSCR) of 1.47x.

 

The structure details for the multi-tranche offering is as follows. Class A1 has original face of $91 million, a weighted average life of 6.39 years, a fixed coupon of 2.151 percent, and a 100.50 offered price. Class A2 has original face of $608 million, a weighted average life of 9.64 years, a fixed coupon of 2.444 percent, and a 101.99 offered price. Class A3 has original face of $174 million, a weighted average life of 9.68 years, a fixed coupon of 2.404 percent, and a 101.99 offered price. The deal was able to capture the recent spread tightening in the market, with the A2 tranche pricing inside of a 50-basis-point spread over swaps.

 

Fannie Mae’s Multifamily Green Financing Business provides financing through several different Green product offerings, encouraging apartment building owners to make energy and water savings improvements to their properties. Green MBS helps to support the reduction of utility costs for families and individual tenants, as well as the reduction of greenhouse gases through retrofits to existing, aging multifamily housing in the United States. In addition, the Fannie Mae Green Financing Business provides financing to properties holding a third-party, Fannie Mae-approved, Green Building Certification. Fannie Mae introduced the Green MBS product to the market in 2012 and has issued $74.5 billion in Green MBS and $9.9 billion in Green GeMS since the program’s inception. Read more about it here. For additional information about this transaction, please refer to the Fannie Mae GeMS REMIC Term Sheet (FNA 2020-M1) available on the Fannie Mae GeMS Archive page.

Fannie Mae priced Connecticut Avenue Securities (CAS) Series 2020-R02, a $1.134 billion note offering that represents Fannie Mae’s second CAS REMIC transaction of 2020. CAS is Fannie Mae’s benchmark issuance program designed to share credit risk on its single-family conventional guaranty book of business. The reference pool for CAS Series 2020-R02 consists of approximately 111,000 single-family mortgage loans with an outstanding unpaid principal balance of approximately $29 billion. The reference pool includes one group of loans comprised of collateral with loan-to-value ratios of 80.01 percent to 97.00 percent, the majority of which were acquired from June through September 2019. 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.

 

Pricing for the deal is as follows. Class 2M-1 has an offered amount of $276.657 million, a pricing level of 1-month LIBOR plus 75 bps and an expected BBB-(sf) / BBB (sf) rating. Class 2M-2 has an offered amount of $567.147 million, a pricing level of 1-month LIBOR plus 200 bps, and an expected B+(sf) / BB- (sf) rating. Class 2B-1, which will not be rated, has an offered amount of $290.490 million at a pricing level of 1-month LIBOR plus 300 bps. With the completion of this transaction, Fannie Mae will have brought 40 CAS deals to market, issued $46 billion in notes, and transferred a portion of the credit risk to private investors on close to $1.5 trillion in single-family mortgage loans, measured at the time of the transaction. Fannie Mae will retain a portion of the 2M-1, 2M-2, and 2B-1 tranches in order to align its interests with investors throughout the life of the deal. Fannie Mae will retain the full 2B-2H first-loss tranche.

 

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. For more information on individual CAS transactions, visit Fannie’s credit risk transfer website. Subject to market conditions, Fannie plans to return to market in late-February with the inaugural CAS Seasoned B-Tranche deal, CAS 2020-SBT1. The transaction will transfer a portion of risk previously retained by Fannie Mae on certain CAS deals issued in 2015 and 2016.

A senior citizen said to his eighty-year old buddy, “So I hear you’re getting married?”

“Yep!”

“Do I know her?”

“Nope!”

“This woman, is she good looking?”

“Not really.”

“Is she a good cook?”

“Nah, she can’t cook too well.”

“Does she have lots of money?”

“Nope! Poor as a church mouse.”

“Well, then, is she good in bed?”

“I don’t know.”

“Why in the world do you want to marry her then?”

“Because she can still drive!”

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “How Epidemics Impact Lending” If you have the inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.

Rob

(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are hundreds of mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2020 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)