Aug. 10: Thoughts on margin calls, LIBOR’s phase out & SOFR mortgages; credit risk transfers continue

Interest rate volatility, LOs not interested in changing companies, the $8,500 cost of doing a mortgage hitting low-balance refi candidates the most, and profit-laden pipelines are capturing everyone’s attention. In secondary market departments, nearly every mortgage banker, or anyone hedging a pipeline, received margin calls this week from dealers.

One capital markets vet advised, “Owners and secondary marketing staff shouldn’t forget the delay in rolling out FINRA 4210, 153 pages of fun. And originators should not have signed the MSFTA addendum that broker/dealers weaseled out of them two years ago enforcing margin requirements. If anyone’s secondary guy is asleep at the wheel, remind them to assign out-of-the-money trades away to maybe friendly depository desks who aren’t required to have their clients post margin in order to avoid cash outlays when the market squeezes my short position. If the market sells back off, and your position dips below the minimum threshold amount, you don’t get your margin call back right away like you did having to post it. Wells Fargo securities is the worst.”

Did someone ask about LIBOR/SOFR?

The publication of LIBOR is not guaranteed beyond 2021. Much work lies ahead in order to implement a successful reference-rate change and time is of the essence. If you or your staff needs a primer, check out this LIBOR Transition Briefing with policymakers at the center of the transition. SIFMA Insights provides an overview of the LIBOR transition, as well as an actionable checklist — with a focus on the proposed US alternative reference rate, Secured Overnight Financing Rate (SOFR).

Banks are largely ahead of other financial institutions in replacing Libor with other interest-rate benchmarks and are playing an important role in helping clients grapple with the impact, industry leaders say. “Our role is to make [customers] aware of the looming urgency of all this,” says Phil Lloyd, head of market structure and regulatory customer engagement for NatWest Markets.

The Federal Reserve-backed Alternative Reference Rates Committee says markets for derivatives referencing the Secured Overnight Financing Rate haven’t had enough volume to be the basis for a forward-looking rate to replace Libor. However, the International Organization of Securities Commissions says some markets are gaining liquidity and could be ready to support a forward-looking rate by the 2021 transition deadline.

Federal Reserve Bank of New York President John Williams recently said that Libor’s survival is ensured for only about 900 more days and that the financial industry must migrate immediately to the Sterling Overnight Index Average, the Secured Overnight Financing Rate and other risk-free rates. UK Financial Conduct Authority CEO Andrew Bailey warned that the transition must convert legacy contracts, in addition to new business (see the actionable transition checklist from SIFMA Insights). “Don’t wait until 1 January 2022 to manage your business’ transition away from Libor, because it’s going to be too late,” Williams said.

ARRC outlined a path for SOFR mortgages. The Adjustable Reference Rates Committee has outlined a proposal for mortgage lenders to build new adjustable rate mortgages using the Secured Overnight Financing Rate ahead of the phase-out of Libor at the end of 2021. The Committee consists of private market participants brought together by the Federal Reserve and New York Fed to help the transition away from Libor, outlined in a white paper how lenders can use a 30 or 90-day SOFR average instead of one-year Libor in adjustable rate mortgages (ARMs). Government-sponsored mortgage enterprises Fannie Mae and Freddie Mac said they supported the proposals and intended to use a SOFR rate for new adjustable rate mortgages before the end of 2021.

Folks should know that because SOFR tends to be lower than Libor, the margin for new SOFR linked mortgages would be higher – in the 2.75%-3% range compared with the 2.25% area at present for Libor-linked loans. Indeed, the two rates are different. SOFR is a secured funding rate, while Libor is not. The SOFR rate would be set every six months, instead of once per year as is the standard for Libor based mortgages.

Of interest to ARM servicers everywhere, ARRC also opened a discussion on how to improve the fallback language to include in existing mortgages that reference Libor. ARRC has opened a 60-day period for feedback from market participants.

Transferring risk & secondary market activity

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 Freddie’s been up to in the capital markets.

In May Freddie Mac priced a new $1.2 billion offering of Structured Pass-Through K-Certificates (K-092 Certificates), which are multifamily mortgage-backed securities, expected to settle on or about May 31, 2019. The K-092 Certificates are backed by corresponding classes issued by the FREMF 2019-K92 Mortgage Trust (K-92 Trust) and guaranteed by Freddie Mac, which will also issue certificates consisting of the Class X2-A, Class X2-B, Class B, Class C, Class D and Class R Certificates, not guaranteed by Freddie Mac and not backed any class of K-092 Certificates. K-Deals are part of the company’s business strategy to transfer a portion of the risk of losses away from taxpayers and to private investors who purchase the unguaranteed subordinate bonds, typically featuring a wide range of investor options with stable cash flows and structured credit enhancement. Pricing for the deal is as follows. Class A-1 has a principal amount of $92.444 million, a weighted average life of 6.69 years, a coupon of 3.125 percent, a yield of 2.775 percent, and a dollar price of 101.999. Class A-2 has a principal amount of $1,112.986 million, a weighted average life of 9.83 years, a coupon of 3.298 percent, a yield of 2.938 percent, and a dollar price of 102.998. Class A-M has a principal amount of $53.046 million, a weighted average life of 9.90 years, a coupon of 3.015 percent, a yield of 3.009 percent, and a dollar price of 99.9943.

It priced a new $783 million offering of Structured Pass-Through K-Certificates (K-1511), multifamily mortgage-backed securities, expected to settle on or about May 16, 2019. In a first for the K-Deal line of securities, Freddie Mac requested and received preliminary designations and breakpoints from the National Association of Insurance Commissioners (NAIC) Structured Securities Group (SSG). The Regulatory Treatment Analysis Service (RTAS) provided a preliminary indication of the probable insurance regulatory treatment of K-1511 guaranteed classes and provided preliminary NAIC breakpoints for the K-1511 mezzanine securities. Freddie Mac expects NAIC’s analysis to help facilitate the purchase of securities by regulated insurance companies to obtain new issue designations and breakpoints. Pricing is as follows: Class A-1 has a principal amount of $94.0 million, a weighted average life of 7.89 years, a coupon of 3.279 percent, yield of 2.97 percent, and dollar price of $101.9966. Class A-2 has a principal amount of $271.0 million, a weighted average life of 11.75 years, a coupon of 3.470 percent, yield of 3.16 percent, and dollar price of $102.9977. Class A-3 has a principal amount of $418.917 million, a weighted average life of 14.65 years, a coupon of 3.542 percent, yield of 3.287 percent, and dollar price of $102.9893. Class X1 has a principal amount of $783.92 million, a weighted average life of 12.84 years, a coupon of 0.9302 percent, yield of 4.005 percent, and dollar price of $8.1678. Class X3 has a principal amount of $87.1 million, a weighted average life of 14.89 years, a coupon of 3.5369 percent, yield of 5.2983 percent, and dollar price of $35.4288.

And Freddie priced $899 million in K-F61 certificates backed by floating-rate multifamily mortgages with ten-year terms, expected to settle on or about May 17, 2019. The K-F61 Certificates will not be rated, and will include one senior principal and interest class, one interest-only class, and one class entitled to static prepayment premiums. The K-F61 Certificates are backed by corresponding classes issued by the FREMF 2019-KF61 Mortgage Trust (KF61 Trust) and guaranteed by Freddie Mac, which will also issue certificates consisting of the Class B, C and R Certificates subordinate to the classes backing the K-F61 Certificates and will not be guaranteed by Freddie Mac. Class A, which has principal of $899.385 million, a weighted average life of 9.62 years, and a coupon of 1-month LIBOR + 53, has a par dollar price of 100.00.

Freddie Mac priced a $504 million K-C Series offering of Structured Pass-Through K-Certificates (K-C04 Certificates), which are multifamily mortgage-backed securities, which are expected to settle on or about June 13, 2019. The K-C04 Certificates are guaranteed by Freddie Mac and are backed by 7-year and 10-year, fixed rate loans that feature longer than typical periods of reduced prepayment penalties before maturity. The K-C04 Certificates are backed by corresponding classes issued by the FREMF 2019-KC04 Mortgage Trust and guaranteed by Freddie Mac. The K-C04 Trust will also issue certificates consisting of Class B, Class C, Class X-C and Class R Certificates, which will not be guaranteed by Freddie Mac and will not back any class of K-C04 Certificates. Pricing for the deal is as follows. Class A-SB has a notional amount of $41.3 million, a weighted average life of 6.02 years, a coupon of 2.49 percent, a yield of 2.52 percent, and a dollar price of $99.9449. Class A-7 has a notional amount of $259.2 million, a weighted average life of 6.52 years, a coupon of 2.83 percent, a yield of 2.64 percent, and a dollar price of $100.9973. Class A-10 has a notional amount of $203.9 million, a weighted average life of 9.53 years, a coupon of 3.01 percent, a yield of 2.88 percent, and a dollar price of $100.9976.

And Freddie priced a $645 million offering of K-LU1 certificates, expected to settle on or about June 14, 2019. Class A-1 has principal of $209 million, a weighted average life of 3.85 years, a coupon of 2.38 percent, a yield of 2.35 percent, and a dollar price of 99.9968. Class A-2 has principal of $136 million, a weighted average life of 5.85 years, a coupon of 2.51 percent, a yield of 2.49 percent, and a dollar price of 99.9971. Class A-3 has principal of $95 million, a weighted average life of 7.09 years, a coupon of 2.63 percent, a yield of 2.62 percent, and a dollar price of 99.9966. Class A-4 has principal of $205 million, a weighted average life of 10.0 years, a coupon of 2.85 percent, a yield of 2.85 percent, and a dollar price of 99.9985.

K-Deals are part of the company’s business strategy to transfer a portion of the risk of losses away from taxpayers and to private investors who purchase the un-guaranteed subordinate bonds. K Certificates typically feature a wide range of investor options with stable cash flows and structured credit enhancement.

Don’t forget Freddie announcing pricing of the second Seasoned Credit Risk Transfer Trust (SCRT) offering of 2019—a rated securitization of approximately $2.4 billion including both guaranteed senior and unguaranteed subordinate securities backed by a pool of seasoned re-performing loans (RPLs). The SCRT securitization program part of Freddie Mac’s seasoned loan offerings which reduce liquid assets in its mortgage-related investments portfolio and sheds credit and market risk via economically reasonable transactions. SCRT Series 2019-2 includes approximately $2.2 billion in guaranteed senior certificates and approximately $247 million in unguaranteed mezzanine and subordinate certificates, expected to settle on May 15, 2019. The underlying collateral consists of 12,406 fixed- and step-rate, seasoned RPLs which were modified to assist borrowers who were at risk of foreclosure to help them keep their homes. As of the cutoff date, all of the mortgage loans have been performing for at least 12 months. The loans are serviced by Select Portfolio Servicing, Inc. and will be serviced in accordance with requirements that prioritize borrower retention options in the event of default and promote neighborhood stability. To date, Freddie Mac has sold $8 billion of non-performing loans and securitized more than $50 billion of RPLs consisting of $29 billion via fully guaranteed PCs, $18 billion via SCRT transactions, and $3 billion via Seasoned Loan Structured Transaction (SLST) transactions. Additional information about the company’s seasoned loan offerings can be found at: http://www.freddiemac.com/seasonedloanofferings.

From Kansas, PK sent:

A New York attorney representing a wealthy art collector called and asked to speak to his client.

“Saul, I have some good news and I have some bad news.”

The art collector replied, “You know, I’ve had an awful day, Jack, so let’s hear the good news first.”

The lawyer said, “Well, I met with your wife today, and she informed me that she has invested only $5,000 in two very nice pictures that she thinks will bring somewhere between $5 to $10 million…and I think she could be right.”

Saul replied enthusiastically, “That’s awesome! My wife is a brilliant businesswoman, isn’t she? You’ve just made my day. Now, I know I can handle the bad news. What is it?”

The lawyer replied, “The pictures are of you and your secretary.”

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, “Residential Lending, Banks, and Market Share.” If you have both the time and 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

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