Fun with categorizing loans
Daniel M. Shlufman, Esq., with Classic Mortgage LLC, wrote, “Lenders have rolled out with a slew of No Income, Asset Verification type products. But, before you think that this is a return to the days of No Income and Sub-Prime Lending, the loans being made now are not that. Due to Dodd Frank and other recent federal regulations, lenders are required to make sure that a borrower has the ‘Ability to Repay’ before making a loan.
“The first type is an Asset Qualifier which is designed for retired folks or those who have a lot of assets but little or no income. They are generally available for up to 75% of the purchase price. Various lenders have slightly different qualifying guidelines, but all require that you have enough assets to pay off the loan entirely and have enough for reserves.
“Another type of loan that is available is a Bank Statement loan. This type of asset-based loan allows lenders qualify a borrower using either personal or business bank account statements. Generally, they require either 12 months of personal bank statements or 24 months of business bank statements. Using these bank statements, the lenders create a monthly income and then apply their housing and debt ratios to this income in the same way they would with employment income. Thus, ensuring a borrower has both enough assets to close on the purchase as well as reserves after closing.
“There are 2 types of reserves that are needed. The first type requires that the purchaser has a certain number (2-6 months depending) of monthly mortgage payments in assets. The other requires that the purchaser has enough assets to make a certain number of payments on ALL their debt. These reserves will need to be from 6 months to 60 months of all debt payments. Though these Asset Based loans are available, they are very fact specific.”
Originators should remember that anything that roils the secondary markets (uncertainty, higher rates, lack of demand, etc.) impacts the primary market – the rates borrowers see.
John Ardy, CEO of the recently acquired Resitrader, has some thoughts on the secondary mortgage market. “We’ve seen CRA trades occurring earlier this year and the overall trend seems to continue to favor bulk mandatory executions. With the rise in mortgage rates and a potential further increase in rates this year, there is an increasing interest from buyers for mortgage servicing rights. We, of course, expected that and we expect that trend to continue during the second half of 2018.
“We’re also seeing a trend in technology within the secondary market speeding up trades between buyers and sellers. Digital trading platforms, for example, are picking up interest for loan traders. Anecdotally, our volume grew 400% since January due to new clients and hedge-advisor relationships. We also see some aggregators buy loans and then turnaround and sell to Fannie/Freddie on our platform. We plan to see more of that during the second half of the year as well.”
Contracts for interest-rate derivatives need to add provisions to account for the possibility of Libor’s demise, said Federal Reserve adviser David Bowman. About $350 trillion worth of financial products worldwide have Libor (London Interbank Offered Rate, aka LIBOR) exposure spanning multiple currencies. Regulators set LIBOR to be phased out in 2021 and have encouraged alternatives to take its place.
Certainly, mortgage bankers are concerned about the coming phaseout of a global interest rate benchmark because, they said at a conference, the transition will entail costs and administrative burdens and the replacement rate is not an ideal substitute. LIBOR’s reputation is deservedly tarnished due to scandals from trader manipulation. LIBOR is based on a survey of banks on what they charge each other for dollars. But it’s the existing benchmark for $200 trillion in dollar-denominated financial products, mostly in interest rate swap contracts.
Mortgage bankers and loan servicers care because roughly $1.2 trillion in mortgages and another $1 trillion in mortgage-backed securities are set against LIBOR, according to the Alternative Reference Rates Committee. A complicated move away from LIBOR could prove disruptive for the mortgage market and perhaps result in a jump in late mortgage payments due to confusion among homeowners because of the change in their interest rate resets. And overhauling computer and accounting systems won’t be cheap.
Alternatives? We need more acronyms in our lives, so the New York Federal Reserve, together with the Office of Financial Research, a government agency, developed the Secured Overnight Funding Rate (SOFR) as a LIBOR alternative. But critics claim that one of SOFR’s shortcomings is that it is not a measure of what banks charge each other to borrow dollars, which LIBOR does, so it is a risk-free rate. SOFR is derived from daily trades in the repurchase agreement market where traders use their Treasuries holdings as collateral to obtain overnight cash. The absence of a liquid futures market for SOFR makes it tough for traders and lenders to extrapolate a longer-term rate to hedge their interest rate risks – but that will change.
Switching gears mildly to mortgage-backed securities, we have less that a year until single securities hit (combining Freddie and Fannie loans). Bill Berliner with MCT wrote, “I attended the conference that Freddie and Fannie co-sponsored and put out a summary to our clients.
“Implementation plans were discussed and issues addressed to help mortgage and MBS market participants prepare for the changes associated with the SSI. This change is scheduled to go live on June 3rd of 2019, although the changes will impact trading as early as March of next year. It is good for the industry to know the basics (about the Single Securitization), how pools, trading, and delivery will be affected, loose-ends to tie up and concerns about the switch, and the main preparatory tasks for lenders.
“Fannie Mae and Freddie Mac will remain separate companies but issue MBS under a single platform. Once the changes go live, Fannie and Freddie pools will be called Uniform Mortgage-Backed Securities (UMBS). The new securities will have the main characteristics of Fannie Mae pools; most importantly, they will have 55 delay days. Pools may be backed by loans guaranteed by both Fannie and Freddie.
“The new securities will be issued by Fannie and Freddie through an entity called the Common Securitization Platform (CSP). Early in the process, the GSEs concluded that the existing systems could not handle the commingling of the two enterprise’s loans in the same securities, necessitating the new platform. The CSP is being built, and will be managed, by a joint venture between Fannie and Freddie called Common Securitization Solutions LLC (CSS). The initiative only impacts conventional fixed-rate MBS. Conventional ARMs and all Ginnie Mae pools are not impacted.
“The objective is to create a level playing field where securitized execution for loan sales is the same irrespective of which GSE provides the guaranty. Previously, the concessions at which Freddie Gold TBAs trade to Fannies (despite their shorter delay) put Freddie Mac at a competitive disadvantage, in that they had to compensate originators to securitize loans as Golds (through the “MAP” adjustment) instead of Fannies.
“Importantly, this is not a merger of Fannie and Freddie. They will continue to operate independently and have their own underwriting and pricing systems while issuing pools through the CSP.”
His note continued, addressing pools, trading, and delivery. “Older (i.e., ‘legacy’) Fannie Mae pools will be deliverable into UMBS TBAs, as will new UMBS pools. Legacy Freddie Gold pools that have a 45-day delay will need to be converted (“exchanged”) into new securities to be delivered into UBMS TBAs. For every existing Gold pool, Freddie Mac will create a deliverable ‘mirror pool’ that will have a new CUSIP and pool number and be backed by the same loans as the legacy pool. Holders of legacy Gold pools will have the option of exchanging them for the mirror pools in whole or in part. Investors exchanging legacy pools for mirror pools will be compensated for receiving a security with 10 extra delay days at the time of the exchange. Investors that own the mirror securities and want to examine the historical performance of the legacy Gold pools will be able to access that information through either Bloomberg or other data sources (e.g., eMBS).
“UMBS will adopt the ticker symbols currently used by Fannie Mae. For example, a deliverable 30-year UMBS pool will be labeled as an FNCL pool. There will be different formats for non-deliverable UMBS; for example, 30-year Gold pools with 105-125% LTVs that are now labeled as FGHLU6 pools will be RHLU6 (basically retiring the ‘G’ and replacing it with an ‘L’) when issued through the UMBS platform.
“Assuming the go-live date is met, TBA trading will transition to the UMBS platform starting in March 2019. Trading in UMBS TBAs will commence after March 2019 Class A notification, as the third month TBA will be settled by delivering new UMBS pools. It’s unclear how the screens will ultimately look, and it’s possible that Tradeweb and Bloomberg screens will look somewhat different. (Tradeweb, for example, plans to display ‘Fannie/UMBS’ and ‘PCGld’ on their screens up to 30 days prior to the change; at that point, the screens will only show ‘UMBS.’)
“It’s unclear how long Gold TBAs will continue trading after UMBS trading goes live. It’s also unclear whether legacy Gold pools will continue trade in their current form (i.e., as Golds) or will be converted to UMBS prior to trading, or whether two parallel markets will develop. Several data providers will supply information on conversions for industry participants to track metrics such as issuance and float. (E.g., investors will need to know how many Gold pools have been exchanged on a particular day, what are the balances of unexchanged Gold pools, etc.)”
At the time Bill wrote this there are still some things that are unclear and/or need to be addressed by regulators and government. For example, the tax treatment of the exchange (particularly the delay-day compensation). How long Gold TBAs will continue to trade after the go-live date. How the prefixes for new non-deliverable UMBS pools will look. And whether legacy Gold pools will trade in their current form or must be exchanged before trading.
“The main tasks for lenders at this point are: Make sure that provisions are made to calculate and/or access the correct durations and pricing for the UMBS on the go-live date. MCT will be involved with the testing leading up to the rollout and will be ready when the CSP goes live.
Lenders that create pools should be aware of the changes and can create and deliver the new UMBS securities without disruptions. Be flexible and prepared to deal with issues as they arise. Remember the adage, ‘you don’t know what you don’t know.’ Make sure that all broker/dealer counterparties are aware of the big changes coming to the MBS market. More information can be accessed here.” Thanks Bill!
The use of the yield curve is becoming more and more questionable as a measure of future economic conditions. Brent Nyitray scribes, “As the 2s-10s spread decreases, many in the financial press are worrying whether the slope of the yield curve is signaling a recession. We already have some strategists calling for the yield curve to invert sometime in 2019. An inverted yield curve (where short-term rates are higher than long term rates) has historically been a strong recessionary signal. Generally, the yield curve flattens during tightening cycles. In fact, it did invert in the late 90s (before the stock market bubble burst) and during the real estate bubble (before the Great Recession). Recent Fed research indicates the 2s-10s spread may not be the best signal of an upcoming recession. It suggests the spread between the 3-month T bills and 18-month Treasuries could be more predictive. Another signal is the Eurodollar futures market. The idea is that the Fed would use these indicators as a yellow signal and stop tightening before they risk a recession.
“Of course, all bets are off when it comes to this yield curve versus the past. The size of the Fed’s balance sheet relative to the economy is vastly different this time around. Pre-Great Recession, the Fed had about $800 billion worth of assets. Now it is about $4.4 trillion. To draw comparisons, you would have to estimate where the 10-year would have been without Operation Twist, QE1, QE2, and QE3. Punch line, the yield curve may in fact invert if the Fed continues to tighten and inflation remains under control. The signal-to-noise ratio of the yield curve is extremely low, so take it with a grain of salt.”
An 80-year old man was arrested for shop lifting.
When he went before the judge in Cincinnati he asked him, “What did you steal?”
He replied, “A can of peaches.”
The judge then asked him why he had stolen the can of peaches, and he replied that he was hungry.
The judge then asked him how many peaches were in the can.
He replied, “6.”
The judge said, “Then I will give you 6 days in jail.”
Before the judge could conclude the trial, the man’s wife spoke up and asked the judge if she could say something.
The judge said, “What is it?”
The wife said, “He also stole a can of peas.”
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