July 30: The ins and outs of servicing rights; Fannie deals; primer on… runway numbering? Saturday Spotlight: Change Wholesale
I know that this is a commentary on residential mortgages, but what say we start Saturday with some totally non-mortgage trivia? Tis the summer travel season, and unfortunately, “The flight leaves at ___” or, “We’re landing at ___” has been replaced by, “The flight is scheduled to leave at ___” or “We’re supposed to land at ___.” Recently I was reminded, if you’ve ever wondered while looking out the airplane’s window, that airport runway numbers aren’t sequential, they are based off compass bearings. North is 0 degrees, south 180 degrees. Runway 9 would be 90 degrees, runway 27 is 270 degrees and so on. The opposite end of the runway always differs by 180 degrees, so it’s numbered 18 higher or lower. For example, Runway 9-27 is oriented east-west. Large airports with parallel runways require further designation. For example one runway will be designated 4L-22R and the other 4R-22L. The “L” and “R” designate the relative position (left or right) of each runway respectively when approaching/facing its direction. I guess this is why pilots make the big bucks… Pilots are paid by the hour, and work a maximum of 1,000 hours a year. (Ever had one “time out” when a flight is delayed on the ground?) That said, an experienced pilot can make upwards of $300k per year. Underwriters know that flight attendants, known by stewardesses by some (although that term doesn’t encompass men so well) make about a third of what a pilot does.
Saturday Spotlight: Change Wholesale
Change Wholesale, a mission-based company focused on closing the wealth gap through home ownership, is America’s largest Community Development Financial Institution (CDFI). Our CDFI certification from the U.S. Department of Treasury allows us to help brokers, borrowers, and communities in ways other lenders and banks simply cannot.
What is Change Wholesale doing to help close the wealth gap?
A home is often the largest and most beneficial investment a person will make in their lifetime. One of the main reasons many Americans have fallen behind the wealth gap is due to the difficulties they face when purchasing a home. To help close the wealth gap, Change Wholesale focuses on providing innovative home financing solutions that meet the diverse needs of Americans, including low- or moderate-income communities, Blacks, and Latinos.
What does it mean to be America’s largest CDFI?
Change Wholesale is America’s largest CDFI by origination volume. This means Change Wholesale has successfully helped more of America’s homebuyers access the flexible financing needed to purchase their first or second home, investment property, or vacation getaway. We’re thankful for our CDFI designation and extremely proud of our ability to help secure home financing for prime borrowers with unique needs.
How do Change Wholesale’s partnerships benefit underserved prime borrowers?
Change Wholesale has strategic partnerships with brands, banks, and other financial institutions to help expand home ownership to underserved individuals and communities. Partnering with organizations like Netflix, Bank of America Merrill Lynch, and East West Bank expands our reach and allows us to bring fair financing solutions to more of America’s prime borrowers.
Can you tell us about your Community Advisory Board (CAB)?
Our CAB is comprised of community members that represent all of our target markets, including low- or moderate-income individuals, low- or moderate-income communities, African Americans, and Latino Americans. Our CAB serves as an intimate focus group that provides us with insightful feedback on how to best serve their communities.
(For more information on having your firm’s extracurricular activities, employee growth, and your charitable side featured, contact Chrisman LLC’s Anjelica Nixt.)
Mortgage servicing rights: a primer and update
This week I attended the California MBA’s Western Secondary. Valuing mortgages was obviously an important topic, and that includes the value of servicing the mortgage after it closes. The pricing borrowers see is due to several things, but the majority is due to MBS (mortgage-backed security) prices and servicing values. MBS prices are straightforward, and are quoted and can be seen on a screen similar to stock prices.
Turning to servicing, it has value. Put another way, every month the servicer receives, say, the $2,000 mortgage payment and sends on $1,990 to whoever owns the security (like an insurance company or pension fund) and keeps $10 for themselves. That $10 has value since it is being collected every month. It is called the mortgage servicing right, or MSR, and the value of it (collecting $10 every month) can be sold and bought. It’s value is directly correlated to how long the $10 comes in. How long a mortgage is around is calculated and then presented as the Constant Prepayment Rate, or CPR, which also goes by the name of Conditional Prepayment Rate.
And companies sell and buy the rights to service a given loan, but more often the servicing of a large block of loans. So when a borrower says, “Hey, I received a letter in the mail saying to send my payment to PHH instead of Cross Country!” that is what has happened: the servicing was sold. Banks like owning servicing rights in their footprint. Large servicers who can service more efficiently tend to buy servicing rights. And so on.
The MSR market indicates that, while servicing has not going down in value, has grown a little “tired.” Multiples reached some levels above 5:1 (for “vanilla” 25 basis point servicing) are now firmly in the 4.5-5:1 multiple range. Not terrible, but one can sense either a) an eye on the possibility of rates dropping some, or b) the usual buyers from the last few years becoming satiated.
This week the Bank of Oklahoma’s Chris Maloney provided an update on the servicing market. “Mortgage servicing rights (MSR) can be considered a form of IO (interest-only) securities, a type of mortgage derivative, if you will, as they represent a stream of income (the servicing fee) charged by the servicer to do all the unglamorous work required to keep the U.S. housing finance system in fine fiddle.
“They are also an excellent hedge for mortgage originators who, during slack times for loan demand, can use the income from their MSR to keep themselves afloat. Just this week Mr. Cooper, for one example, saw its stock price surged 10.1% in one day due to their servicing segment revenue coming in at $395 million, above the Street’s estimate for $321.5 million. Rocket (Quicken) executives during their 1st quarter earnings call specifically pointed to the $1.4 billion of annualized revenue thrown off by their servicing rights as ballast for their ship. Mr. Cooper’s executives in its 1st quarter earnings call spoke to ‘The benefits of our balance business model, which by design includes a much higher contribution from servicing than most of our peers.’
“So it is of interest to see who the largest servicers of agency mortgages out there are, as this may give a hint to the financial stability of the company and reduce the chance that they will need to put their MSR up for sale in an attempt to keep the lights on or, even worse, go under during this recession. I used Bloomberg’s Collateral Performance Research tool as of the end of June, and aggregated all the conventional and Ginnie Mae (of all types) into two distinct data sets. Please note this is not a recommendation concerning the equity of any company mentioned below.
“Turning first to the conventional side of our universe, we see the top ten servicers, of which the top two are traditional banks: Wells Fargo ($501 billion) and JPM Chase ($470 billion). Among these servicers, the average 1-month CPR in the latest report was 9.4, with Quicken being fastest (11.2) and United Shore the slowest (6.3)
“Moving over to the Ginnie Mae universe, we find that the top three are, unsurprisingly, non-banks, led off by Freedom ($255 billion) who are followed by PennyMac ($232 billion) and Lakeview ($214 billion.) Also no surprise, the 1-month CPR seen in these MSRs was faster than seen on the conventional side, averaging 13.2 in the latest report, with Freedom fastest (16.8) and Caliber slowest (11.2).” Thank you, Chris!
Fannie in the secondary markets
The “deals” done by Freddie Mac, Fannie Mae, and others help determine the rates that borrowers see. These securitizations “test the waters” for demand for mortgages with an implied government backing. Let’s take a random look at Fannie’s activities.
Fannie Mae priced a $736 million Multifamily DUS REMIC under its Fannie Mae Guaranteed Multifamily Structures (Fannie Mae GeMS) program on April 11. FNA 2022-M8 marks the fourth Fannie Mae GeMS issuance of 2022. M8 included a small group of ARM 7-6 collateral, which is a 7-year, SOFR-based floater with a 6% cap on the pass-through rate. The product enables smaller borrowers who may not want to manage their own interest rate cap to participate in the popular floating-rate market. For additional information, please refer to the Fannie Mae GeMS REMIC Term Sheet (FNA 2022-M8) available on the Fannie Mae GeMS Archive page.
Fannie Mae announced that it has executed its fifth Credit Insurance Risk Transfer (CIRT) transaction of 2022. As part of Fannie Mae’s ongoing effort to reduce taxpayer risk by increasing the role of private capital in the mortgage market, CIRT 2022-5 transferred $733.3 million of mortgage credit risk to private insurers and reinsurers. The covered loan pool for CIRT 2022-5 consists of approximately 67,700 single-family mortgage loans with an outstanding unpaid principal balance of approximately $21 billion. The covered pool includes collateral with fixed-rate, generally 30-year terms, loan-to-value ratios of 80.01 percent to 97.00 percent acquired between October 2021 and December 2021. Since inception to date, Fannie Mae has acquired approximately $19.2 billion of insurance coverage on $656.6 billion of single-family loans through the CIRT program. With CIRT 2022-5, which became effective April 1, 2022, Fannie Mae will retain risk for the first 65 basis points of loss on the $21 billion covered loan pool. If the $136.2 million retention layer is exhausted, 22 insurers and reinsurers will cover the next 350 basis points of loss on the pool, up to a maximum coverage of $733.3 million. To promote transparency and to help insurers and reinsurers evaluate the CIRT program, Fannie Mae provides ongoing, robust disclosure data, as well as access to news, resources, and analytics through its credit risk transfer webpages.
Fannie Mae announced its latest sale of non-performing loans as part of the company’s ongoing effort to reduce the size of its retained mortgage portfolio, including the company’s nineteenth Community Impact Pool (CIP), smaller pools of loans that are geographically focused and marketed to encourage participation by non-profit organizations, minority- and women-owned businesses (MWOBs), and smaller investors. The two larger pools include approximately 3,320 loans totaling $489.6 million in unpaid principal balance (UPB), and the CIP includes approximately 120 loans totaling $36.3 million in UPB. The CIP consists of loans geographically located in the New York area. All pools are available for purchase by qualified bidders. Bids are due on the two larger pools on June 7, 2022, and on the CIP on June 21, 2022. Terms of Fannie Mae’s non-performing loan transactions require the buyer of the non-performing loans to offer loss mitigation options designed to be sustainable for borrowers. Interested bidders are invited to register for future announcements, training, and other information here.
Fannie Mae announced the results of its twenty-fifth reperforming loan sale transaction, which included approximately 7,500 loans totaling $1.47 billion in unpaid principal balance (UPB), divided into three pools. The winning bidders of the three pools for the transaction were Pacific Investment Management Company LLC (PIMCO) for Pools 1 and 2 and MCLP Asset Company, Inc. (Goldman Sachs) for Pool 3, each awarded individually. The transaction is expected to close on June 17, 2022. Pool 1: 1,925 loans with an aggregate UPB of $595,670,413, average loan size of $309,439, weighted average note rate of 3.64 percent, and weighted average broker’s price opinion (BPO) loan-to-value ratio of 63 percent. Pool 2: 3,706 loans with an aggregate UPB of $507,534,359, average loan size of $136,949, weighted average note rate of 4.26 percent, and weighted BPO loan-to-value ratio of 50. Pool 3: 1,928 loans with an aggregate UPB of $365,402,568, average loan size of $189,524, weighted average note rate of 3.99 percent, and weighted BPO loan-to-value ratio of 59 percent. Reperforming loans are loans that have been or are currently delinquent but have reperformed for a period of time. The terms of Fannie Mae’s reperforming loan sale require the buyer to offer loss mitigation options to any borrower who may re-default within five years following the closing of the reperforming loan sale. Interested bidders can register for ongoing announcements, training, and other information here. Fannie Mae will also post information about specific pools available for purchase on that page.
Fannie Mae priced Connecticut Avenue Securities (CAS) Series 2022-R04, an approximately $1.1 billion note offering that represents Fannie Mae’s fourth CAS REMIC transaction of the year. CAS is Fannie Mae’s benchmark issuance program designed to share credit risk on its single-family conventional guaranty book of business. The reference pool for CAS Series 2022-R04 consists of approximately 118,000 single-family mortgage loans with an outstanding unpaid principal balance of approximately $36 billion. The reference pool includes collateral with loan-to-value ratios of 60.01 percent to 80.00 percent, which were acquired between April 2021 and May 2021. The loans included in this transaction are fixed-rate, generally 30-year term, fully amortizing mortgages and were underwritten using rigorous credit standards and enhanced risk controls. With the completion of this transaction, Fannie Mae will have brought 48 CAS deals to market, issued over $55 billion in notes, and transferred a portion of the credit risk to private investors on just over $1.8 trillion in single-family mortgage loans, measured at the time of the transaction. Fannie Mae provides ongoing, robust disclosure data, as well as access to news, resources, and analytics through its credit risk transfer webpages.
Fannie Mae announced that it has executed its fourth Credit Insurance Risk Transfer (CIRT) transaction of 2022. As part of Fannie Mae’s ongoing effort to reduce taxpayer risk by increasing the role of private capital in the mortgage market, CIRT 2022-4 transferred $844.8 million of mortgage credit risk to private insurers and reinsurers. The covered loan pool for CIRT 2022-4 consists of approximately 76,600 single-family mortgage loans with an outstanding unpaid principal balance of approximately $23.1 billion. The covered pool includes collateral with loan-to-value ratios of 60.01 percent to 80.00 percent acquired between June 2021 and August 2021. The loans included in this transaction are fixed-rate, generally 30-year term, fully amortizing mortgages and were underwritten using rigorous credit standards and enhanced risk controls. Since inception to date, Fannie Mae has acquired approximately $18.4 billion of insurance coverage on $635.6 billion of single-family loans through the CIRT program, measured at the time of issuance for both post-acquisition (bulk) and front-end transactions. To promote transparency and to help insurers and reinsurers evaluate the CIRT program, Fannie Mae provides ongoing, robust disclosure data, as well as access to news, resources, and analytics through its credit risk transfer webpages.
From NY, Ira S. sent, “How to Write Good.”
1. Avoid alliteration. Always.
2. Prepositions are not words to end sentences with.
3. Avoid cliches like the plague. They’re old hat.
4. Comparisons are as bad as cliches.
5. Be more or less specific.
6. Writers should never generalize.
Seven. Be consistent!
8. Don’t be redundant; don’t use more words than necessary; it’s highly superfluous.
9. Who needs rhetorical questions?
10. Exaggeration is a billion times worse than an understatement.
11. Never write one words sentences. Period.
12. Think long and hard before your write anything that could be misconstrued as a sexual innuendo.
13. Never put things in parenthesis (under any circumstances).
14. Above all else, be concise. Don’t carry on and on. No one likes to keep on reading and reading and not go anywhere with it. Make sure that your reader understands what you are trying to convey in as few words as possible.
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 titled, “The All-Cash Phenomenon.” The Commentary’s podcast is live and at any place you obtain your podcasts (like Apple or Spotify).
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