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Mike AwadisSenior Vice PresidentFirstSouthwest Company1620 26th Street, Suite 230 SouthSanta Monica, CA 90404Phone: 310.401.8060Email: [email protected]
Single-Family Financing Essentials, Part 2: Securing the Best Price
NCSHA 2014 HFA InstituteWashington, DC
January 15, 2015
©2015 First Southwest Company. All rights
reserved.
DisclaimerThis presentation is intended for educational and informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product. Information provided in this presentation was obtained from sources that are believed to be reliable; however, it is not guaranteed to be correct, complete, or current, and is not intended to imply or establish standards of care applicable to any attorney or advisor in any particular circumstances. The statements within constitute FirstSouthwest’s views as of the date of the report and are subject to change without notice. This presentation represents historical information only and is not an indication of future performance.
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©2015 First Southwest Company. All rights
reserved.
Contents
• Market Recap
• TBAs Underperform in the Rally
• Mortgage Activity on the Rise
• Specified pools
• HFA CRA Partnerships
• HFA TBA Production Trends
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©2015 First Southwest Company. All rights
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Market Recap• Dollar up
• Stock Market Up – despite the recent correction
• Yields way down
– 10-year Treasury near term lows hitting below 1.80%
– 30-year Treasury at an all time low hit 2.40%
• Oil way down and pointing lower as a result of the economic slowdown in Asia, Europe and the stronger dollar
• US economy strong – despite the disappointing retail sales announced yesterday
• It’s all up to the US Consumer – the last bastion of economic growth
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©2015 First Southwest Company. All rights
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TBAs Underperforms• Last week’s Administration announcement related to the FHA MIP
reduction was not well received by MBS investors– Fear of acceleration in prepayments– Evidenced by the BU/BD grids published earlier this month by Fannie– Analysts estimate 6-9 CPR impact at the 4% coupon (1% in price). The 4%
coupon has been the worst performer
• TBAs have underperformed in virtually every session this month compared to the benchmark 10 year Treasury
– Liquidity only shows in the longer slower duration assets -- 3 and 3.5 coupon
• Ginnie/Fannie swaps sold off drastically on the news– 4% coupon Ginnie MBS was the worst performer
• Given where rolls are trading 4% MBS is priced at 21 CPR (less than 4.5 year average life)
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©2015 First Southwest Company. All rights
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TBAs Underperform – Spread GN2 4s vs 10 Year
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TBAs Underperform – Spread GN2/FN 4.0
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TBAs Underperform – Spread GN2 4.0/3.5
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©2015 First Southwest Company. All rights
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Mortgage Activity On the Rise
• Last week mortgage applications spike – biggest gain in 6 years
• According to the Mortgage Bankers Association weekly survey– Total volume increased 49.1% over previous week on seasonally adjusted
basis – Refinance applications up 66%– Conventional applications up 71%– Purchase activity up 24%
• National average 30 year mortgage rate is now 3.89%
• It’s a perfect storm -- 97% LTV announcement by Fannie, the reduction in MIP by FHA and the market rally is fueling the activity
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©2015 First Southwest Company. All rights
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Specified Pools – HFA Loan Pay-ups
• A smaller but significant portion of agency MBS trade outside of the TBA market
• Known as “Specified Pool” – The identity of the securities to be traded is specified at the time of trading
– Some of these pools are typically not eligible for TBA trading
– Backed by loans with more favorable prepayment characteristics – allowing them to achieve higher prices
• Factors impacting pricing for specified pools today– Supply demand technicals and the volume of available MBS – GN1/GN2 swap
– Interest rate environment – less demand in a rising rate market
• CRA buyers make up a significant portion of the “specified” pool market
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©2015 First Southwest Company. All rights
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Benefits of HFA/Bank CRA Partnerships
• HFA gets a forward dollar commitment at a specified spread to market
• Allows the HFA to price the pay-up into the daily rate setting process making programs more competitive
• Benefits buyer by allowing them to lock-in the cost of acquiring CRA investments
• Allows buyer to specify the type, location and characteristics of collateral to be purchased
• Potentially helps banks get a more favorable CRA rating in their periodic exams with regulators
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HFA TBA Programs Continue to Grow – Despite Volatility• Since July 2012 representing 10 state HFAs and over $3.7 billion in locks
• CY 2014 locks of $2.0 billion
• Average daily locks are up over 50% in the last 12 months
©2015 First Southwest Company. All rights
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Best Practices – What Have We Learned
• Expand your product menu include multiple DPA and rate options
• The primary driver of HFA volume is still the need for DPA
• Statistics show DPA does not have to be a grant to have a successful program
• Jr lien DPA can be a significant source of residual income for an HFA
• Manage your pull-thru rate by optimizing lock terms
• Don’t give lenders more time than they need to close and sell the loans
• This will keep your rate more competitive with market
• Make your program as lender friendly as possible – eliminate unnecessary forms and streamline the approval process
• Marketing, marketing, marketing – online, newsletters
• Develop a robust email marketing campaign with your lenders and realtors
• Make sure lenders understand the HFA Preferred 97 benefits compared to standard
• Rate does matter – keep interest spreads tight with market
• Maintain flexibility in your gain-on-sale margins. A “set it and forget it” approach is less effective than maintaining a tighter spread to market
©2015 First Southwest Company. All rights
reserved.
Agency TBA MBS Market
Appendix
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TBA (Mortgage-Backed) Securities Market• Mortgage-backed securities (MBS) -- debt obligations
• The most common form of MBS are pass-through certificates
• MBS are highly liquid -- particularly those backed by agency guarantees
• Most mortgages in the US are securitized through the agency MBS market
• This trading convention significantly improves agency MBS liquidity – leading to lower mortgage rates for households
• The key distinguishing feature of agency MBS is they carry a form of government guarantee – explicit (Ginnie Mae) or implied (Fannie and Freddie)
• Other distinguishing feature is the existence of liquid forward market for trading
• “TBAs” or “To Be Announced” are a form of future contracts
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TBA (Mortgage-Backed) Securities Market – continued• Vast majority of MBS trading (over 90%) occurs in the forward market – TBA Market
• Seller and buyer agree to a sale price without identifying the specific pool numbers
• Six basic characteristics -- issuer, maturity, coupon rate, price, par amount and settlement date are agreed upon
• Pools guaranteed by Ginnie Mae (a federal government agency), Fannie Mae or Freddie Mac (GSEs) can be allocated to TBA transactions
• The goal of the TBA market was to create liquidity
• A hedging tool – with settlement dates up to nine months out -- allows lenders to “lock in” sale prices for loans The use of dollar rolls allows the seller to extend hedges
• Drivers of market activity are broker dealers
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©2015 First Southwest Company. All rights
reserved.
TBA (Mortgage-Backed) Securities Market – continued• TBA trading occurs electronically on an over-the-counter basis
Two platforms, DealerWeb (interdealer trades) and TradeWeb (customer trades) Trades can take place via telephone, fax or e-mail – not common
• Securities Industry and Financial Markets Association (SIFMA) has specific rules regarding what constitutes TBA eligible deliveries also knows as “good delivery”
• Only mortgages meeting certain size and credit quality criteria “conforming mortgages” are eligible for inclusion
• Sheer aggregate size and the homogenous nature of agency MBS contribute significantly to liquidity – compared to corporate bonds or munis
• TBA Market is the largest debt market in the world outside of US Treasuries
• Virtually every primary broker/dealer on the street and in the world makes a market in TBA MBS
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TBA (Mortgage-Backed) Securities Market – continued• TBA Market is made possible largely because agency MBS are exempt from the
registration requirement of the Securities Act of 1933
• Although not required, agencies do publicly disclose information about the composition of each pool
• Similar to Treasury futures, TBAs trade on a “cheapest-to-deliver” basis
• On a forty-eight-hour day, the seller selects which MBS in its inventory will be delivered to the buyer at settlement
• In practice, most TBA trades do not ultimately lead to a transfer of physical MBS
In most cases the seller will either unwind or “roll” an outstanding trade
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Liquidity
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TBA Program Benefits When Compared to MRB• Provides a no risk forward commitment mortgage program with no costs of
issuance, negative arbitrage and legal expenses (outsourced)
• Produces a significantly lower mortgage rate when compared with Pass-Thru and traditional MRB structures – including using zeros
• Fund down payment and closing cost assistance without using HFA funds
• Flexibility to adjust rates as the market moves -- no yield implications
• Affords HFAs the option to pay higher lender compensation
• Can be used to provide financing for non-first time homebuyers
• Program is more lender friendly -- less paperwork for the lender
• Can be combined with MCCs thus creating a lower effective mortgage rate
• Gives HFAs the option of offering refinances
• Significantly more profitable for HFAs than tradition MRBs and Pass-Thru structures both on present value and ongoing basis
• It can be used as a tool to accumulate MBS for future bond transactions
• Either “Pass-thru” or “Traditional MRB” structures
• HFA has the option to repurchase its MBS at prevailing TBA levels
©2015 First Southwest Company. All rights
reserved.
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Disadvantages• Because it does not require explicit authority to issue bonds or relies on volume cap,
other entities can offer competing programs
• Cal Rural Home Mortgage Finance Authority (CHF) operates a statewide program in California – in light of its power to only operate on 32 rural counties
• National Homebuyers Fund – a nonprofit subsidiary of CHF – operates statewide programs is 24 other states
• No ongoing issuer fee income, the HFA’s income is made up of gain-on-sale and residual income when the DPA or the second mortgage is repaid
©2015 First Southwest Company. All rights
reserved.
Specified Pools – HFA Loan Pay-ups
• A smaller but significant portion of agency MBS trade outside of the TBA market
• Known as “Specified Pool”
The identity of the securities to be traded is specified at the time of trading
Some of these pools are typically not eligible for TBA trading
Backed by loans with more favorable prepayment characteristics – allowing them to achieve higher prices
• Factors impacting pricing for specified pools today
Supply demand technicals and the volume of available MBS – GN1/GN2 swap
Interest rate environment – less demand in a rising rate market
• CRA buyers and FHLB make up a significant portion of the “specified” pool market
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©2015 First Southwest Company. All rights
reserved.
TBA Market Snapshot
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©2015 First Southwest Company. All rights
reserved.
Pricing Example
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60 Day Rate Lock
11/6/201412/22/2014
1/5/20151/21/2015
Yes0 points0 points
Gross Rate (%)
Servicing Fee (%)
Guarantee Fee (%)
MBS Coupon (%)
GNMA Type SRP
60 Day Rate Lock
60 Day Servicing Released Price DPA (%)
Lender Fee (%) HFA P&L (%)
3.750 0.190 0.060 3.500 GN2 0.380 103.26563 103.64563 3.500 2.500 (2.35438) 3.875 0.315 0.060 3.500 GN2 0.880 103.26563 104.14563 3.500 2.500 (1.85438) 4.000 0.440 0.060 3.500 GN1 1.390 103.26953 104.65953 3.500 2.500 (1.34047) 4.125 0.565 0.060 3.500 GN2 1.800 103.26563 105.06563 3.500 2.500 (0.93438) 4.250 0.190 0.060 4.000 GN2 0.380 105.76953 106.14953 3.500 2.500 0.14953 4.375 0.315 0.060 4.000 GN2 0.880 105.76953 106.64953 3.500 2.500 0.64953 4.500 0.440 0.060 4.000 GN1 1.390 105.83203 107.22203 3.500 2.500 1.22203 4.625 0.565 0.060 4.000 GN2 1.800 105.76953 107.56953 3.500 2.500 1.56953 4.750 0.190 0.060 4.500 GN2 0.380 108.12109 108.50109 3.500 2.500 2.50109 4.875 0.315 0.060 4.500 GN2 0.880 108.12109 109.00109 3.500 2.500 3.00109 5.000 0.440 0.060 4.500 GN1 1.390 108.21094 109.60094 3.500 2.500 3.60094 5.125 0.565 0.060 4.500 GN2 1.800 108.12109 109.92109 3.500 2.500 3.92109 5.250 0.190 0.060 5.000 GN2 0.380 109.21094 109.59094 3.500 2.500 3.59094
30YR FIXED RATE GOVERNMENT MORTGAGE
ASSUMPTIONSInitial Rate Lock DateRate Lock Expiration DateLatest Lender Loan Sale to Master Servicer DateLatest GNMA Security (MBS) Settlement DateServicing release premium included in rate lock price?Gain built into rate lock priceLender fees built into rate lock price
30YR FIXED RATE GOVERNMENT MORTGAGE