Remember that ridiculous misconception that people age 24-39 (this year) were not interested in buying houses, and couldn’t afford to buy them because they were buying too much avocado toast? That’s long gone, and we are reminded every day that housing is a matter of supply and demand: lots of people and not enough single-family homes to buy. The pandemic, however, will likely have lingering effects on population growth. Maybe it is a good thing not many babies came into the world in 2020. The U.S. population increased 0.4% in 2020 (to nearly 330 million), marking the lowest growth rate since 1900. A falling birth rate and an aging population means the past 10 years mark the slowest overall decade of population growth in the nation’s history. Stalling population growth could have major implications for potential economic output in the longer term. Between millennials delaying marriages and families, the labor market under pressure, and decreased immigration from other countries, the trend doesn’t look set to reverse for a while. As Phyllis Diller stated, “I want my children to have all the things I couldn’t afford. Then I want to move in with them.”
Freddie and Fannie: the topic never goes away
Last year, in 2020 (weird to say that instead of 2019), the reform of the Agencies/Government Sponsored Enterprises (GSEs) was a constant topic in the industry and among regulators. Housing is so intertwined with politics that thinking they’d ever be fully separated is a pipe dream. Everyone realizes that because of the size and complexity of F&F, decisions can’t be made hastily. But steps were made toward recapitalizing them and releasing them.
Several months ago the two were given permission to start retaining earnings, and not every dollar was “swept up” into the U.S. Government. A report was issued U.S. Treasury that did not decisively declare the demise of the Net Worth Sweep. Instead, the report detailed the need to capitalize the companies and signals an intermediate step before fully amending the PSPAs. Specifically, one of the UST’s recommendations is to adjust “the variable dividend on Treasury’s senior preferred shares so as to allow the GSE to retain earnings in excess of the $3 billion capital reserve currently permitted.”
In effect, the Treasury Department and the FHFA could use a letter agreement to increase the amount of allowable capital reserves held by each GSE in order to begin the retention process. This is a step removed from a complete PSPA overhaul, which would be a far more expansive undertaking, but it would allow the GSEs to begin building capital as early as this year. The report was viewed as a slight disappointment by market participants, but increasing the capital reserves has almost the same impact while providing the time and negotiating leverage necessary to craft a comprehensive PSPA amendment.
Others will tell you that, so far, the recapitalization plans all show a conceptual commitment, but are light on precise details. The recapitalization section outlines a number of potential options, including eliminating the senior preferred’s liquidation preference, exchanging the senior preferred into common stock, increasing the capital reserve amount, issuing new securities, negotiating exchanges with junior preferred shareholders, or placing the GSEs in receivership.
As the UST explains, each of these potential options “poses a host of complex financial and legal considerations that will merit careful consideration as Treasury and FHFA continue their effort, already underway, to identify and assess these and other strategic options.” The Treasury Department appears fully supportive of the effort to recapitalize the GSEs, but the precise manner remains subject to future discussions with the FHFA, the GSEs, bankers, lawyers, and investors. The reference to potentially issuing “convertible debt or other loss-absorbing instruments, through private or public offerings,” is good since it demonstrates a willingness to creatively address the capital question. The UST’s capitalization commentary should be viewed as a conceptual commitment to taking action, but the next stages of the capital story will unfold behind closed doors as policymakers craft the GSE recapitalization plans, negotiate the PSPA amendment, and finalize the regulatory capital rule.
Obviously allowing F&F to retain earnings is a big step in a lengthy process. The recent rumors of Mark Calabria trying to release F&F from conservatorship prior to Inauguration Day have gone away, fortunately, but lenders should be aware that the discussion will continue. And we all hope that plans don’t disrupt the financing of housing in the United States.
Meanwhile, their future structure is being debated, Freddie Mac and Fannie Mae (and others) continue to execute in the secondary markets. And since the demand in the secondary markets determines the rates borrowers see in the primary markets, it is good for MLOs to have at least a cursory vision of who is doing what.
For example, deal structure…
Moody’s assigned provisional ratings to four classes of mortgage insurance credit risk transfer notes issued by Oaktown Re V Ltd., the second transaction issued under the Oaktown Re program in 2020, which transfers to the capital markets the credit risk of private mortgage insurance (MI) policies issued by National Mortgage Insurance Corporation on a portfolio of residential mortgage loans. The notes are exposed to the risk of claims payments on the MI policies, and depending on the notes’ priority, may incur principal and interest losses when the ceding insurer makes claims payments on the MI policies. The insured pool consists of high-quality mortgage loans with full documentation underwritten to GSE requirements except for about 4.66% of the loans which were not underwritten to GSE guidelines. None of the loans in the reference pool have been reported to the ceding insurer as two payment loan default. Pricing for the deal is as follows. Class M-1A has a Baa2 rating on a $69.676 million coverage level amount, with a 4.85% subordination and 1.15% of RIF. Class M-1B has a Ba1 rating on a $78.764 million coverage level amount, with 3.55% subordination and 1.30% of RIF. The other two classes are inconsequential.
In early December 3 Freddie Mac priced a new $1.3 billion offering of Structured Pass-Through K Certificates (K-121 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 $215.297 million of principal, a weighted average life of 7.20 years, a spread of S+30 bps, a 0.995% coupon, a yield of 0.98811% and a $99.9955 price. Class A-2 has $930.705 million of principal, a weighted average life of 9.86 years, a spread of S+32 bps, a 1.547% coupon, a yield of 1.21669% and a $102.9921 price. Class A-M has $156.673 million of principal, a weighted average life of 9.93 years, a spread of S+37 bps, a 1.277% coupon, a yield of 01.27126% and a $99.9997 price. The K-121 Preliminary Offering Circular Supplement can be found at http://www.freddiemac.com/mbs/data/k121oc.pdf.
Recently Freddie Mac priced its $1.086 billion STACR REMIC 2020-DNA5 offering, its first Single-Family credit risk transfer (CRT) offering tied to the Secured Overnight Financing Rate (SOFR). STACR REMIC 2020-DNA5 is structured to use 30-day average SOFR published daily by the Federal Reserve Bank of New York as the reference rate, with a determination date of two business days prior to the beginning of the accrual period for the STACR notes. Freddie Mac intends to structure future CRT transactions to a compliant one-month term SOFR if the appropriate regulatory authority approves such a rate. Once term SOFR is ready and administratively feasible, Freddie Mac expects to cease new issuance using a compound average of SOFR and to solely use term SOFR. However, at this point there is no estimate when or if such a rate will be endorsed by the ARRC and approved for use. STACR REMIC 2020-DNA5 is Freddie Mac’s fifth securities transaction of the year covering single-family loans with low loan-to-value (LTV) ratios between 61% and 80%. The loans were securitized between April 1, 2020 and May 15, 2020 and originated on or after January 1, 2015. Pricing is as follows. M-1 class: 30-day Average SOFR plus a spread of 130 basis points. M-2 class: 30-day Average SOFR plus a spread of 280 bps. B-1 class: 30-day Average SOFR plus a spread of 480 bps. B-2 class: 30-day Average SOFR plus a spread of 1,150 bps. Freddie Mac has led the market in introducing new credit risk sharing opportunities. Since 2013, the company has transferred a portion of credit risk on approximately $1.7 trillion in unpaid principal balance (UPB) on single-family mortgages.
In the summer Freddie Mac priced a new $257 million offering of Structured Pass-Through K Certificates (K-J29 Certificates) which are backed by underlying collateral consisting of supplemental multifamily mortgages and are expected to settle on or about June 11. Pricing for the deal is as follows. Class A-1 has principal of $70.000 million, a weighted average life of 4.24 years, a coupon of 0.735 percent, a yield of 0.7252 percent, and a $99.9963 price. Class A-2 has principal of $187.961 million, a weighted average life of 6.78 years, a coupon of 1.409 percent, a yield of 1.0915 percent, and a $101.9962 price. K-Deals are part of the Freddie’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. K Certificates typically feature a wide range of investor options with stable cash flows and structured credit enhancement.
Also this summer Freddie Mac announced the settlement of the first Seasoned Loans Structured Transaction Trust (SLST) offering of 2020, a securitization of approximately $948 million including both guaranteed senior and non-guaranteed subordinate securities backed by a pool of seasoned re-performing loans (RPLs). The SLST program is a fundamental part of Freddie Mac’s seasoned loan offerings which reduce less-liquid assets in its mortgage-related investments portfolio and shed credit and market risk via economically reasonable transactions. Freddie Mac SLST Series 2020-1 includes approximately $730 million in guaranteed senior certificates and approximately $218 million in non-guaranteed subordinate certificates. The guaranteed senior certificates priced on July 22 through a syndicated process. The subordinate certificates were awarded on July 23 via an auction. The underlying collateral backing the certificates consists of 6,026 fixed- and step-rate modified seasoned re-performing and moderately delinquent loans. These loans were modified to assist borrowers who were at risk of foreclosure to help them keep their homes. To date, Freddie Mac has sold over $8 billion of non-performing loans and securitized approximately $65 billion of re-performing loans. Additional information about the company’s seasoned loan offerings can be found at: http://www.freddiemac.com/seasonedloanofferings/.
And Freddie Mac priced a new $901 million offering of Structured Pass-Through K Certificates (K-F82 Certificates), which includes a class of floating rate bonds indexed to the Secured Overnight Financing Rate (SOFR), and are expected to settle on or about August 6. The K-F82 Certificates are backed by floating-rate multifamily mortgages with 10-year terms, which are currently LIBOR-based. K-F82 includes one class (Class AL) of senior bonds indexed to LIBOR and another class (Class AS) of senior bonds indexed to SOFR. 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. Pricing for the deal is as follows. Class AL has a principal of $451.517 million, a weighted average life of 9.48 years, a coupon of 1-month LIBOR plus 37, and a $100.00 price. Class AS has a principal of $450.000 million, a weighted average life of 9.48 years, a coupon of 30-day SOFR plus 42, and a $100.00 price. 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.
Fannie is also somewhat active! Fannie Mae marketed its sixteenth sale of reperforming loans as part of the company’s ongoing effort to reduce the size of its retained mortgage portfolio. The sale consists of approximately 18,300 loans with an unpaid principal balance of approximately $3.4 billion and is available for purchase by qualified bidders. Interested bidders can register at https://www.fanniemae.com/portal/funding-the-market/npl/index.html. This sale of reperforming loans is being marketed in collaboration with Citigroup Global Markets, Inc. Bids are due on August 18. Reperforming loans are loans that were previously delinquent but have reperformed for a period of time. Some of the loans may be up to 90 days delinquent. The terms of Fannie Mae’s reperforming loan sale require the buyer to offer loss mitigation options designed to be sustainable to any borrower who may re-default within five years following the closing of the reperforming loan sale.
After all these deals, it comes as no surprise that the Freddie Mac Monthly Volume Summary for August 2020 (for example) showed that its mortgage portfolio growth rate accelerated in August. The total mortgage portfolio increased at an annualized rate of 27.7 percent in August, bringing its month-end balance to $2.53 trillion. Single-family refinance-loan purchase and guarantee volume was $87.2 billion in August, representing 70 percent of total single-family mortgage portfolio purchases and issuances. The single-family delinquency rate increased to 3.17 percent in August from 3.12 percent in July. Previously, Freddie Mac’s mortgage portfolio grew 20 percent, annualized, in July. The Monthly Volume summary provides information on Freddie Mac’s mortgage-related portfolios, securities issuance, risk management, delinquencies, debt activities, and other investments.
Remember, if you lose a sock in the dryer, it comes back as a Tupperware lid that doesn’t fit any of your containers.
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