Easter Weekend! What do you call a sleepwalking nun? A roamin’ Catholic! Grass cutting season is upon us. What do you get the guy who has everything, including a lawn? How about a robotic lawn mower that also mulches the grass? What’ll they think of next? (It reminds me of the classic “cat in a dragon suit riding a Rumba” video.) This real grass, on real land, usually with a real house. But what about artificial land? Ever heard of Decentraland or Cryptovoxel? Isn’t real life enough? “Land” prices are shooting higher in these fake places where the concept of scarcity is invented. They, whoever’s making a buck off of gamers, can just keep making more! In real life, real estate investing is based on “they’re not making more of it!” and “location, location, location.” And oddly Wall Street created a fund to invest in artificial places. What am I missing here?
Saturday Spotlight: Candor, a platform to underwrite loans and manage risk.
This week we highlight Candor, the only firm to bring Rocket Science to mortgage manufacturing (see Fun Fact below). Over the last seven months, Candor’s machine has conducted >400,000 underwrites and has provided significant ROI to its clients.
In 3-5 sentences, describe your company. Candor has created a new category by way of their Loan Engineering System, aka LES. LES is a Machine that thinks and works like an Underwriter to quickly underwrite loans, manage risk, and contain costs. Team Candor believes this platform will one day be a core component of the lender’s technology stack.
Things you are most proud of that don’t have to do with sales. We are proud to be the first to introduce an Expert System** to the market. Our patent pending Loan Engineering System, LES, is an Expert System predicated upon a very special kind of technology known as Knowledge Engineering Technology, which Candor has trade marked as CogniTech. CogniTech makes our underwriting engine dynamically adaptive to underwrite loans, manage risk, and contain costs. This solution has taken more than four years to design and develop.
And we are proud to have developed a revolutionary innovation that creates profound and meaningful change to the mortgage industry. The state of innovation in the mortgage industry is “unprofitable.” Lenders are hungry for meaningful ROI from innovation and have been frustrated with the many stops and starts that add additional cost and generate a very low ROI. Candor set out to determine how the lender can generate a return. This is hard to do and not for the faint of heart.
Fun fact about Candor. In the early part of his career, Candor CEO Tom Showalter, was literally a rocket scientist. What do mortgage manufacturing and rocket science have in common? For starters, complex calculations, elaborate workflows, enormous risk, and a zero tolerance for errors. Tom is the architect of our patent pending Loan Engineering System, LES. LES conducts a statistical analysis by triangulating data through double-triple redundant systems. In lay terms, LES applies aerospace technology to confirm the truth and accuracy of all loan data, even in complex situations such as self-employed, or multiple income sources.
**Only an Expert System can replicate knowledge and skills of human experts and “think” through and solve problems without human experts’ participation. This is what makes Candor able to handle the unpredictable problems associated with underwriting.
Agency deals help lower borrower rates
Originators tend to have their heads in the primary market, working with borrowers and funding loans. Why should an MLO care what happens in the secondary markets? The Agencies (aka Freddie and Fannie) continue to help borrowers both the primary and secondary markets, hoping to achieve competitive pricing in the secondary market while limiting risks borne by taxpayers. It’s a function of supply and demand, and if someone wants to own risk, why not sell it to them?
In previous years, billions of dollars of conforming conventional loans have been bundled into CRT (Credit Risk Transfer) bond deals, nonperforming, or multifamily deals, which help reduce taxpayer exposure to the large book of mortgages guaranteed by Freddie and Fannie and help the Agencies manage their capital. In general, GSE reform needs to ensure stability in the MBS market, but also preserve price signaling from the private sector. Ensuring the smooth functioning of the conventional TBA market is paramount, and most believe that this requires a government backstop behind private capital.
These deals involve sharing part of the credit risk with third party investors, for a price. Investors pay cash up front and purchase debt securities that are designed to absorb the credit losses on GSE (government sponsored enterprises) loan pools. The goal is to attract private capital into the mortgage market and shift some risk away from taxpayers since we are currently on the hook for Freddie & Fannie. Fannie Mae and Freddie Mac have still been pricing transactions to aid liquidity in the mortgage space, providing support for its borrowers and up-to-date disclosures for our investor base. And that helps rate sheet pricing for borrowers!
But FHFA Director Mark Calabria is not a fan of CRTs. Several months ago the Mortgage Bankers Association is concerned the GSEs’ strength and stability would be undermined by the Federal Housing Finance Agency’s re-proposed capital rule, particularly its treatment of CRT programs. The MBA said any plan to release Fannie Mae and Freddie Mac from conservatorship should include a strong CRT program in order to reduce taxpayer risk by attracting private capital. IMF reports that, “’Prior to the release of the enterprises from conservatorship, FHFA and Treasury should clarify the precise parameters of any government support or backstop for the enterprises.’”
Andrew Netter, Senior Financial Consultant with Milliman (an actuarial and quantitative consulting firm specializing in mortgage credit modeling and providing quantitative solutions to investors, insurers, regulators, servicers and lenders) sent the link to a recent white paper on GSE CRT market developments on the capital markets side: The GSE CRT market reopens post COVID-19 disruption: A new normal? Or more troubles on the horizon?
But lenders should know that CRTs are not the only game in town. Both Fannie and Freddie are very active in the secondary markets, multifamily securities being a big component, and let’s take a random look at Freddie’s autumn deals, their sizes, and their parameters. Freddie Mac’s Multifamily Securitization Overview can be found here. Finding investors for securities is a great way to help keep rates low for borrowers.
Freddie Mac priced a $1.2 billion offering of Structured Pass-Through K-114 Certificates, which are backed by underlying collateral consisting of fixed-rate multifamily mortgages with predominantly 10-year terms. Pricing for the deal is as follows. Class A-1 has a principal of $97.197 million, a weighted average life of 6.94 years, a spread of S+37, a coupon of 0.829 percent, a yield of 0.82283 percent, and a $99.9957 price. Class A-2 has a principal of $969.194 million, a weighted average life of 9.82 years, a spread of S+42, a coupon of 1.366 percent, a yield of 1.03738 percent, and a$102.9965 price. Class A-M has a principal of $142.077 million, a weighted average life of 9.85 years, a spread of S+47, a coupon of 1.094 percent, a yield of 1.08885 percent, and a $99.9981 price. The K-114 Certificates settled on or about August 20, 2020.
Freddie offered up another multifamily deal: a $709 million offering of Structured Pass-Through K Certificates (K-S14 Certificates) backed exclusively by multifamily mortgages on seniors housing properties. Freddie’s fourteenth K Certificate offering backed exclusively by seniors housing is expected to settle on or about September 30. Pricing for the deal is as follows. Class A-FX has $211.656 million of principal, a weighted average life of 9.53 years, a spread of S+46, a coupon of 1.1180 percent, a yield of 1.1125 percent, and a $99.9982 price. Class AL has $287.948 million of principal, a weighted average life of 8.17 years, a spread of S+34, a coupon of 0.4968 percent, a yield of 0.4973 percent, and a $100.00 price, the same price as Class AS. Class AS has $210.000 million of principal, a weighted average life of 8.17 years, a spread of S+37, a coupon of 0.4550 percent, and a yield of 0.4554 percent. Finally, Class X-FX has $211.656 million of principal, a weighted average life of 9.53 years, a spread of T+325, a coupon of 1.1234 percent, a yield of 3.8584 percent, and a $8.999 price.
In another multi-family move, Freddie Mac priced a new $1.1 billion offering of Structured Pass-Through K Certificates (K-111 Certificates), which are backed by underlying collateral consisting of fixed-rate multifamily mortgages with predominantly 10-year terms. Class A-1 has principal of $89.529 million, a weighted average life of 6.47 years, a spread of 40 bps, a coupon of 0.827 percent, a yield of 0.82015 percent, and a $99.9967 price. Class A-2 has principal of $919.617 million, a weighted average life of 9.75 years, a spread of 41 bps, a coupon of 1.35 percent, a yield of 1.01946 percent, and a $102.9963 price. Class A-M has principal of $148.634 million, a weighted average life of 9.86 years, a spread of 46 bps, a coupon of 1.08 percent, a yield of 1.07499 percent, and a $99.9973 price.
On September 24, Freddie Mac priced another new offering of Structured Pass-Through K Certificates. The company expects to issue approximately $1.2 billion in K-116 Certificates, which are expected to settle on or about September 30, 2020. Class A-1 has $146.000 million of principal, a weighted average life of 6.70 years, a spread of S+28, a coupon of 0.730 percent, a yield of 0.72406 percent, and a $99.9972 price. Class A-2 has $973.039 million of principal, a weighted average life of 9.75 years, a spread of S+39, a coupon of 1.378 percent, a yield of 1.04731 percent, and a $102.9922 price. Class A-M has $162.832 million of principal, a weighted average life of 9.88 years, a spread of S+45, a coupon of 1.121 percent, a yield of 1.11601 percent, and a $99.9961 price. The main residual class, Class X1, has $1,119.039 million of principal, a weighted average life of 9.08 years, a coupon of 1.42759 percent, a yield of 2.40563 percent, and a $11.6620 price.
On September 18, Freddie Mac priced its latest agency-guaranteed structured multifamily securities offering. The $881 million of Structured Pass-Through K-1517 Certificates are composed of multifamily mortgage-backed securities which are expected to settle on or about September 24, 2020. Pricing for the deal is as follows. Class A-1 has $108.000 million of principal, a weighted average life of 10.32 years, a spread of S+48, a coupon of 1.177 percent, a yield of 1.17225 percent, and a $99.9951 price. Class A-2 has $773.647 million of principal, a weighted average life of 14.37 years, a spread of S+62, a coupon of 1.716 percent, a yield of 1.48036 percent, and a $102.9934 price.
At the end of summer Freddie Mac Multifamily announced it would market a new impact series – Sustainability Bonds. This new K-SG offering is intended to attract capital to support economic mobility for residents and economic growth for affordable and workforce housing communities. The proceeds of Freddie Mac’s Sustainability Bonds will be used to finance multifamily properties that (a) finance affordable housing to low-to-moderate-income families, (b) may have features, or are located in areas, that further economic opportunity for residents and (c) may include certain environmental impact features. The inaugural K-SG01 transaction will be backed by eligible 10-year, fixed-rate loans selected in accordance with Freddie Mac Sustainability Bonds Framework.
But Freddie is not the only one out there grabbing securitization headlines. Ginnie Mae reported that more than 2.8 million households secured affordable homeownership and rental housing in the fiscal year that ended September 30, 2020 because of the record $748 billion in Ginnie Mae MBS issued in the year. Issuance was fueled by historically low mortgage rates and strong demand for housing. Ginnie Mae, the largest source of mortgage liquidity for first-time homebuyers, delivered record breaking volume and financing its government guaranteeing and insuring partners (the previous record was $504 billion in 2017). A breakdown of September issuance of $75.76 billion includes $72.24 billion of Ginnie Mae II MBS and $3.52 billion of Ginnie Mae I MBS, which includes $3.36 billion of loans for multifamily housing. For the fiscal year, $712.86 billion of Ginnie Mae II and $35.66 billion of Ginnie Mae I MBS were issued, including $30.74 billion in loans for multifamily housing.
The following month Ginnie Mae MBS announced it issued more than $76.4 billion of securities issued in October, up from $75.8 billion in September and $60 billion one year ago. This fourth consecutive month above $70 billion represents home financing for nearly 277,000 households, and good liquidity and value of the only government guaranteed MBS. Issuance was broken down into $72.49 billion of Ginnie Mae II MBS (aggregate principal and interest payment from a central paying agent) and $3.95 billion of Ginnie Mae I MBS (separate principal and interest payments on certificates), which includes $3.85 billion of loans for multifamily housing. Ginnie Mae’s total outstanding principal balance as of October 31 was $2.12 trillion, an increase from $2.10 trillion in October 2019.
Don’t let your worries get the best of you; remember, Moses started out as a basket case.
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