Although Congress never actually voted on it, today is viewed as National Margarita Day. Because one fellow promoted it. It would be nice to have someone out there promote a law that Uber and Lyft cars are required to have front license plates. But I’ll save that rant for another day. On to mortgage stuff!
Ever wonder about why lenders just can’t disobey the laws in financial markets? How you can’t buy a stock one day, see it go down the next, and call whoever sold it to you and ask to have them forget all about it and send your money back? Sometimes I wonder if inexperienced LOs think they can do that after locking. I received this note from a capital markets vet. “Most investors do have written policies explaining how pair off fees can be charged on Best-Efforts locks. Using an investor as a ‘hedge’ against a falling rate environment isn’t the right thing to do. If one or two loans absolutely must be moved to another Best Efforts investor, ok, it happens, but if there is a pattern of expiring/cancelled locks actually closing elsewhere, the investor definitely is within their right to charge a fee to the lender. One of the top investors in the business actively tracks Best Efforts locks that do not close with them, and if you fall below a certain pull through percentage, future locks are charged a fee if they do not close.”
Automated appraisals and valuations
The search for 100% accurate, inexpensive, and fast automatic valuation of homes has been going on for a while. Buying a house, sight unseen, based on an estimate is problematic. Investors who purchase billions of dollars of securities backed by mortgages are understandably wary. If an automatic valuation model values a house at $600,000, and the borrower borrows $525,000 to buy it, and the value is only $300,000 and the borrower defaults, that’s a problem.
I received this note from an originator in Florida. “Selling a home is not hard, getting the right price might be. Right now a house in my neighborhood has a Zestimate of $514k. It would sell in a weekend at $950k. My neighbors are often stunned when I tell they about where their homes would sell. There’s another local house where the owner paid $340k in 2019. It recently appraised at $585k (needs work). The Zestimate is $327k. There are 12,500 people in a very small town where there is only one home for sale in the $400-550k price range in town. It’s one block from that $585 house above. It recently listed at $475k and had 9 offers over $500k. Stories like this aren’t confined to Florida, and cause issues of confidence in the industry.
Transition to SOFR
Trillions of dollars of debt around the world is tied to LIBOR. But what about in the United States? As an example of careful phrasing, LIBOR is “not guaranteed to be published past 2021.” Fed Chair Powell testified that the Federal Reserve admits, “…There’s a question about having a credit sensitive rate in addition to SOFR. SOFR will be the main substitute for LIBOR, but (the Fed is) working with regional and some of the larger banks too about the idea of also having a credit sensitive rate, and that’s something that’s ongoing.”
Most lenders are moving forward. A small number have stopped doing adjustable rate mortgages tied to LIBOR, or at least have plans to. More have inserted fallback language in new ARM notes. And it is believed that most, if not all, servicers have evaluated their book of business to ascertain their exposure to LIBOR.
Lenders and investors are uncertain about SOFR, how it will behave and the potential timeline for a term structure, how much guidance regulators or potentially legislators will give and when, and how the market will react to the transition. The move isn’t as simple as swapping out copy machines. Contracts must be looked at, borrowers with loans tied to LIBOR must be contacted and perhaps given personalized instructions, operations and technology must be switched over. Despite language in ARM notes mentioning a possible transition, lenders are not clear whether market consensus and standards will emerge as a defense against litigation.
The industry will follow Fannie and Freddie’s thoughts on indices (indexes?) for adjustable rate mortgages. Both, through the FHFA, have made it clear that by the end of the year they are done accepting mortgages backed by LIBOR (London Inter-bank Offered Rate) Servicers and borrowers know that many loans are tied to LIBOR’s rates which help determine the monthly mortgage payment on adjustable-rate mortgages.
The GSEs have been working together with the Alternative Reference Rates Committee in order to secure and define a replacement for LIBOR once the rate ends. This year Fannie and Freddie will begin accepting mortgages backed by the secured overnight financing rate, or SOFR. And after Freddie and Fannie flesh out their plans, you can bet investors and lenders will follow. The FHFA issued a news release that highlighted certain changes affecting single-family and multifamily adjustable-rate mortgage (ARM) products that Fannie Mae and Freddie Mac (the GSEs) announced they are implementing as they transition away from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR).
I received this note from Corelogic’s Jacquie Doty. “I am working on end of LIBOR solutions. Here’s a video blog I just did on this topic. Please feel free to share.”
Global fintech Finastra is hosting its annual event, Finastra Universe, at Marriott Marquis in Time Square on March 4. Specific topics of discussion include: Readiness: Lending after LIBOR: The transition to alternative rates before the end-date and what banks need to do to be ready for the change. “The Journey to Better Regulatory Compliance: From LIBOR to SOFR: Managing the transition. What’s Next: How the end of LIBOR connects corporate lending with the treasury and capital markets functions. Jay Wolstenholme, a Senior Principal at Finastra and a former senior analyst at both Celent and TABB Group, is available to discuss the transition onsite or over the phone. Jay has over 25 years of experience in the capital markets sphere and is available to address the future state of automated technology.”
But the Federal Home Loan Banks have slowed down their issuance of bonds tied to Libor’s replacement, the Secured Overnight Financing Rate, in a move that could prompt more issuers to follow suit. FHLB Office of Finance CEO Randy Snook says that during the Libor transition, the banks “will continue to practice appropriate risk management while assessing the relative value in both the SOFR cash and derivative markets.”
The Agencies are Alive and Well
And are very active in the secondary markets. This includes quantifying and transferring risk from the taxpayer to entities that want to own it. I recently highlighted Fannie’s activities, so let’s see what Freddie Mac has been up to. At least skimming the details is good for LOs to know what investors look for in pools.
Freddie Mac announced the pricing of the SB71 offering, a multifamily mortgage-backed securitization backed by small balance loans underwritten by Freddie Mac and issued by a third-party trust. The company expects to issue approximately $379 million in SB Certificates (SB71 Certificates), which are expected to settle on or about February 21. Freddie Mac Small Balance Loans generally range from $1 million to $7.5 million and are generally backed by properties with five or more units. This is the second SB Certificate transaction in 2020. Freddie Mac is guaranteeing four senior principal and interest classes and one interest only class of securities issued by the FRESB 2020-SB71 Mortgage Trust. Freddie Mac is also acting as mortgage loan seller and master servicer to the trust. In addition to the five classes of securities guaranteed by Freddie Mac, the trust will issue certificates consisting of Class B and Class R Certificates, which will not be guaranteed by Freddie Mac and will be sold to private investors. Pricing for the deal is as follows. Class A-5H has principal of $148.708 million, a weighted average life of 4.08 years, a spread of 54 bps, a coupon of 2.13 percent and a $100.4963 price. Class A-7F has principal of $66.876 million, a weighted average life of 5.50 years, a spread of 50 bps, a coupon of 2.07 percent, and a $100.4740 price. Class A-10F has principal of $89.784 million, a weighted average life of 7.22 years, a spread of 62 bps, a coupon of 2.21 percent, and a $100.4951 price. Class A-10H has principal of $74.591 million, a weighted average life of 7.20 years, a spread of 66 bps, a coupon of 2.25 percent, and a $100.4946 price. The Optigo Small Balance Loan origination initiative was first announced in October 2014, and expands Freddie Mac’s continuing effort to better serve less populated markets and provide additional liquidity to smaller apartment properties. Freddie Mac has a specialty network of Optigo Seller/Servicers and Optigo SBL lenders with extensive experience in this market who source loans across the country.
Freddie Mac announced pricing on the SB70 offering, the first SB Certificate transaction in 2020. SB70 is a $412 million multifamily mortgage-backed securitization of small balance loans underwritten by Freddie Mac and issued by a third-party trust. The deal settled in late January. Freddie Mac Small Balance Loans generally range from $1 million to $7.5 million and are backed by properties with five or more units. Freddie Mac is guaranteeing three senior principal and interest classes and one interest only class of securities issued by the FRESB 2020-SB70 Mortgage Trust. Freddie Mac is also acting as mortgage loan seller and master servicer to the trust. Pricing for the deal is as follows. Class A-5H has principal of $145.75 million, a weighted average life of 4.06 years, a coupon of 2.32 percent, a yield of 2.1663 percent, and a $100.4772 price. Class A-10F has principal of $128.94 million, a weighted average life of 7.18 years, a coupon of 2.38 percent, a yield of 2.2940 percent and a $100.4728 price. Class A-10H has principal of $96.75 million, a weighted average life of 7.21 years, a coupon of 2.45 percent, a yield of 2.3647 percent, and a $100.4683 price. The Optigo Small Balance Loan origination initiative is going on its sixth year of existence, and helps to expand Freddie Mac’s effort to better serve less populated markets and provide additional liquidity to smaller apartment properties. Freddie Mac has a specialty network of Optigo Seller/Servicers and Optigo Small Balance Loan lenders with extensive experience in this market who source loans across the country.
Freddie Mac priced a new $425 million offering of Structured Pass-Through K Certificates that are backed by multifamily loans sold to a third party and securitized by Freddie Mac. The K-I05 Certificates settled in late January. Class A, the only offered class, has a $425.778 million notional amount, a weighted average life of 1.89 years, a coupon of 1-month LIBOR plus 34 bps, and an even 100.00 price.
Freddie Mac priced a new $1.2. billion offering of Structured Pass-Through K Certificates (K-737 Certificates), which are backed by underlying collateral consisting of fixed-rate multifamily mortgages with predominantly 7-year terms. The company expects the transaction to settle on or about January 30, 2020. Pricing for the deal is as follows. Class A-1 has principal of $183.1 million, a weighted average life of 4.49 years, a 2.116 percent coupon, a 1.97459 percent yield, and a $100.4994 price. Class A-2 has principal of $1,025.1 million, a weighted average life of 6.60 years, a 2.525 percent coupon, a 2.02113 percent yield, and a $102.9954 price. Class A-M has principal of $66.7 million, a weighted average life of 6.74 years, a 2.097 percent coupon, a 2.08429 percent yield, and a $99.9965 price.
Freddie Mac priced a new $731 million offering of Structured Pass-Through K Certificates (K-F74), which includes a class of floating rate bonds indexed to the Secured Overnight Financing Rate (SOFR). The certificates are expected to settle on or about February 20, and are backed by floating-rate multifamily mortgages with 7-year terms, which are currently LIBOR-based. K-F74 includes one class (Class AL) of senior bonds indexed to LIBOR. This $481.017 million class has a weighted average life of 6.67 years and a coupon of 1-month LIBOR plus 44 bps and an even $100.00 price. Another class of senior bonds, Class AS, is indexed to SOFR. That $250.00 million class has a weighted average life of 6.67 years, a coupon of 1-month average SOFR plus 53 bps, and also an even $100.00 price. Freddie Mac will provide a basis risk guarantee on Class AS that covers any floating interest rate basis risk if the value of SOFR exceeds the value of LIBOR. The structure is similar to K-F73, which priced in December 2019.
Here’s a diversion from the usual jokes and trivia in this slot. “If A Dog Could Talk” is a very well filmed video worth seven minutes of your time. It is also a reminder that adopting a pet is a fine and noble thing. And it’s easy, just enter your zip code here. And there are Human Societies around the nation. And the American Society for the Prevention of Cruelty to Animals. Just this week there was a heart-wrenching story about a 12-year old boy who took his puppy, with its toy, to a shelter so that his father wouldn’t beat it. What the heck?
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