Jan. 4: Changes in capital markets, Agency risk transfer helping borrowers, Credit Linked Note primer
The general environment? I received this tough note from a capital markets veteran. “Mortgages have been moving toward becoming a commodity business for years. Look at TBA securities and TradeWeb. Highly compensated MBS salespeople are exiting the business; they aren’t making a tick on every bond. As more technology enters the market, the trend should continue. We’ve been seeing this unfold for decades, and it’s been slow to implement, but I imagine someday mortgages will be like the travel industry. Now look at Zillow entering the mortgage market, with continued fears of Amazon. My biggest gripe is why does a realtor get 5 to 6% for selling a house? That’s an outrageous bid/offer spread in the world of the internet. Why does an LO make so much money? Why does it still cost $8,700 to produce a loan? Seems shocking. The irrational wholesale pricing we saw a year ago never lasts, but anyone with headquarters outside of an expensive state like California or New York (thus operating a business in a cheaper state) and following ‘The Wolf of Wall Street’ playbook can impact the industry.”
Agency deals continue
The Agencies (aka Freddie and Fannie) continue to help that process in both the primary and secondary markets, hoping to achieve competitive pricing in the secondary market while limiting risks borne by taxpayers. Along those lines, 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 the two housing giants and help the Agencies manage their capital.
These deals involve sharing part of the credit risk with third party investors – for a price. In the deals, the 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. And that helps rate sheet pricing for borrowers!
During the most recent committee call, the MBA Secondary & Capital Markets Committee discussed the differences between the Consolidated Securitization Risk Transfer structure (CSRTs) and Direct Issue Credit Linked Notes (CLNs). A CSRT involves an originating bank sending loans through a depositor to a specified purpose entity (SPE) where the loans will be classified by tranche (AAA to B or NR) before being sold to investors for cash that goes back through the depositor to the originating bank. The originating bank will begin by transferring a pool of mortgages through a depositor to a securitization SPE in accordance with FDIC Safe Harbor provisions, with cash flows of the Asset Backed Securities (ABS) issued by the SPE depending on transferred mortgage pool performance. Senior tranches are retained by the originating bank, with lower rated tranches, including first loss, sold to investors. Cash proceeds from the sale of junior tranches are commensurate with the investors obligation to absorb losses. The originating bank retains servicing of the mortgages and consolidates the SPE due to asset servicing and holding senior tranches. The transferred mortgages remain on the originating bank’s U.S. GAAP balance sheet. Normally, investors get about 95 percent of the ABS and the originating bank retains the remaining 5 percent.
When it comes to Direct Issue CLNs, the originating bank issues CLNs directly to investors, with the proceeds going directly from the investors to the originating bank. CLN cash flows are linked to the performance of a defined pool of underlying loans, providing the originating bank with first loss protection on the reference pool. Pool performance reporting from the reference loan pool is made available to both the originating bank and investors. Cash proceeds from CLN issuance are commensurate with the investors’ obligation to absorb losses. No actual transfer of the loans takes place, and the originating bank continues to recognize underlying loans on its balance sheet.
The first commercial mortgage-backed security linked to the Secured Overnight Financing Rate has been priced by Freddie Mac as part of a series of bonds backed by multifamily properties. “Freddie’s goal was to provide support to the fledgling SOFR bond market, create liquidity and provide proof of concept with a test case for multifamily securities tied to SOFR,” says Robert Koontz, senior vice president of multifamily capital markets.
In an industry first, Freddie Mac priced a new offering of Structured Pass-Through K Certificates (K-F73), which includes a class of floating rate bonds indexed to the Secured Overnight Financing Rate (SOFR). The approximately $765 million in K-F73 Certificates are expected to settle on or about December 20, 2019. The K-F73 Certificates are backed by floating-rate multifamily mortgages with 10-year terms, which are currently LIBOR-based. Freddie Mac is using K-F73 to provide support to the SOFR bond market ahead of a SOFR multifamily mortgage offering and to help ease the eventual transition away from LIBOR. K-F73 includes one class (Class AL: $565.645 million, 1-month LIBOR + 60 bps coupon) of senior bonds indexed to LIBOR and another class (Class AS: $200.00 million, 1-month average SOFR + 67 bps coupon) of senior bonds indexed to SOFR. Freddie Mac will provide a guarantee on Class AS that covers any basis mismatch if the SOFR-based index exceeds the LIBOR-based index. The underlying LIBOR-based multifamily mortgages and the K-F73 bonds indexed to LIBOR will convert to an alternate index, which may be SOFR, if LIBOR ceases to be published. Both classes have weighted average lives of 9.54 years and even $100.00 prices. The transaction helps ease the transition from LIBOR to SOFR, and underscores Freddie Mac’s commitment to providing market liquidity and stability.
On December 6, Freddie Mac priced a new $1.1 billion offering of Structured Pass-Through K Certificates (K-102), which are backed by underlying collateral consisting of fixed-rate multifamily mortgages with predominantly 10-year terms. The company expects the K-102 Certificates to settle on or about December 12. Pricing for the deal is as follows. Class A-1has principal of $99.754 million, a weighted average life of 6.83 years, a coupon of 2.184 percent, a yield of 2.091 percent, and a $100.4991 price. Class A-2 has principal of $1,011.978 million, a weighted average life of 9.77 years, a coupon of 2.537 percent, a yield of 2.187 percent, and a $102.9937 price. Class A-M has principal of $64.993 million, a weighted average life of 9.87 years, a coupon of 2.246 percent, a yield of 2.240 percent, and a $99.9952 price.
As part of Freddie Mac’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, on December 5, Freddie priced a $599 million K-C Series offering of Structured Pass-Through K Certificates (K-C07), which are multifamily mortgage-backed securities. The company expects the K-C07 Certificates to settle on or about December 13, 2019. The K-C07 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. K Certificates typically feature a wide range of investor options with stable cash flows and structured credit enhancement. Pricing for the deal is as follows. Class A-SB has principal of $50.50 million, a weighted average life of 5.10 years, a coupon of 2.182 percent, a yield of 2.214 percent, and a $99.750 price. Class A-7 has principal of $500.183 million, a weighted average life of 6.78 years, a coupon of 2.512 percent, a yield of 2.3378 percent, and a $100.9946 price. Class A-10 has principal of $49.02 million, a weighted average life of 9.75 years, a coupon of 2.591 percent, a yield of 2.4689 percent, and a $100.9938 price.
Freddie Mac priced a new $647 million offering of Structured Pass-Through K Certificates (K-1514), comprised of multifamily mortgage-backed securities, that were expected to settle on or about December 12, 2019. Pricing for the four classes is as follows. Class A-1 has principal of $90.0 million, a weighted average life of 10.73 years, a coupon of 2.481 percent, a yield of 2.4226 percent, and a $100.4948 price. Class A-2 has principal of $557.691 million, a weighted average life of 14.84 years, a coupon of 2.859 percent, a yield of 2.6144 percent, and a $102.9927 price. Class X1 has principal of $647.691 million, a weighted average life of 13.83 years, a coupon of 2.859 percent, a yield of 2.6144 percent, and a price of $6.5297. Finally, Class X3 has principal of $71.965 million, a weighted average life of 14.62 years, a coupon of 2.857 percent, a yield of 5.3937 percent, and a price of $28.2141. 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-1514 guaranteed classes and provided preliminary NAIC breakpoints for the K-1514 mezzanine securities. The K-1514 Preliminary Offering Circular Supplement can be found at http://www.freddiemac.com/mbs/data/k1514oc.pdf.
Freddie Mac announced the settlement of the third Seasoned Loans Structured Transaction Trust (SLST) offering of 2019, a securitization of approximately $1.3 billion 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 2019-3 includes approximately $1.069 billion in guaranteed senior certificates and approximately $257 million in non-guaranteed subordinate certificates. The guaranteed senior certificates priced on November 19 through a syndicated process. The right to purchase the subordinate certificates was awarded through a competitive auction in September to New York Mortgage Trust Inc. The underlying collateral backing the certificates consists of 8,121 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. The loans will be serviced by Select Portfolio Servicing, Inc. in accordance with requirements that prioritize borrower retention options in the event of a default and promote neighborhood stability. To date, Freddie Mac has sold over $8 billion of non-performing loans (NPLs) and securitized more than $60 billion of RPLs consisting of $29 billion in fully guaranteed PCs, $25 billion in Seasoned Credit Risk Transfer senior/sub securitizations, and $7 billion in SLST transactions. Additional information about the company’s seasoned loan offerings can be found at http://www.freddiemac.com/seasonedloanofferings/.
Freddie Mac priced a new offering of Structured Pass-Through K Certificates (K-103), which are backed by underlying collateral consisting of fixed-rate multifamily mortgages with predominantly 10-year terms. The company expects to issue approximately $1 billion in K-103 Certificates, which are expected to settle on or about December 19, 2019. 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. K Certificates typically feature a wide range of investor options with stable cash flows and structured credit enhancement. Class A-1 has principal of $109.473 million, a weighted average life of 6.98 years, a coupon of 2.312 percent, a yield of 2.22147 percent, and a $100.4946 price. Class A-2 has principal of $929.128 million, a weighted average life of 9.85 years, a coupon of 2.651 percent, a yield of 2.3014 percent, and a $102.9993 price. Class A-M has principal of $59.029 million, a weighted average life of 9.93 years, a coupon of 2.359 percent, a yield of 2.35365 percent, and a $99.9916 price.
Fannie Mae announced that it has completed its eighth and final Credit Insurance Risk Transfer (CIRT) transaction of 2019, covering loans previously acquired by the company. The deal, CIRT 2019-5, covers $18.5 billion in unpaid principal balance of 15-year and 20-year original term fixed rate loans, as part of Fannie Mae’s ongoing effort to reduce taxpayer risk by increasing the role of private capital in the mortgage market. With CIRT 2019-5, which became effective October 1, 2019, Fannie Mae will retain risk for the first 15 basis points of loss on a $18.5 billion pool of single-family loans with loan-to-value ratios greater than 70 percent and less than or equal to 97 percent. If the $27.8 million retention layer is exhausted, twenty-one insurers and reinsurers will cover the next 130 basis points of loss on the pool, up to a maximum coverage of approximately $241 million. CIRT 2019-5 expanded coverage of 15- and 20-year fixed rate loans, relative to prior CIRT deals that covered similar product, by including loans with lower loan to value ratios. The deal increased Fannie Mae’s risk transfer, relative to those prior deals, by extending the deal term from 7.5 years to 9 years and reducing the first loss retention layer to 15 basis points. To date, Fannie Mae has committed to acquire approximately $10.6 billion of insurance coverage on $404.6 billion of single-family loans through the CIRT program, measured at the time of issuance for both post-acquisition (bulk) and front-end transactions.
The covered loan pool for the CIRT 2019-5 consists of fixed-rate loans that were acquired by Fannie Mae from June 2018 through June 2019. A summary of key deal terms, including pricing, for these new and past CIRT transactions can be found here. Since 2013, Fannie Mae has transferred a portion of the credit risk on single-family mortgages with an unpaid principal balance close to $2.0 trillion, which includes the full contract amount for front-end CIRT transactions, measured at the time of transaction, through its credit risk transfer efforts, including CIRT, Connecticut Avenue Securities (CAS), and other forms of risk transfer. As of September 30, 2019, $1.2 trillion in outstanding unpaid principal balance of loans in our single-family conventional guaranty book of business were included in a reference pool for a credit risk transfer transaction. Depending on market conditions and other factors, Fannie Mae expects to continue coming to market with CIRT and CAS deals that allow private capital to gain exposure to the U.S. housing market. More information on Fannie Mae’s credit risk transfer activities is available here.
On their second anniversary, a husband sent flowers to his wife at the office.
He told the florist to write “Happy Anniversary, Year Number 2!” on the card.
She was thrilled with the flowers, but not so pleased about the card: “Happy Anniversary. You’re Number 2.”
This explains why words are so important.
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