July 5: LO culture; securitizations and Agency risk transfers continue to change capital markets

Basketball folks have been talking about 33-year old LeBron James signing a four-year, $154 million deal with the Lakers. I don’t know the intricacies and details of the contract, but that averages out to roughly $38 million a year, nor am I going to take the time to figure out the debt-to-income ratio on his two Southern California digs. But the photos look nice. The economic picture looks good for King James. And possibly not so bad for others, and that is helps drive rates. In a joint interview, Warren Buffet and Jamie Dimon said the economy is strong and still has steam. Reasons stated by Dimon for this forecast, “Business sentiment is almost at the highest level it’s ever been, consumer sentiment is at its highest levels, markets are wide open, housing’s in short supply and my guess is mortgage credit will expand a little bit.” (More below on secondary marketing and what is influencing rates these days.)

LO training & culture

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Capital markets

Demand in the secondary markets, along with demand for portfolio product, drive rates in the primary market that borrowers see. That, combined with Freddie and Fannie transferring risk from the taxpayer (since they are under government conservatorship) to the private sector, make for interesting developments. Let’s see what has been happening in the secondary markets.

Angel Oak Capital Advisors has completed its second securitization of 2018 (AOMT 2018-2), a $402 million offering that is their largest to date. This brings Angel Oak’s total to approximately $1.6 billion in secured residential loans over seven securitizations in three years. AOMT 2018-2 is almost entirely comprised of non-QM residential mortgages that were primarily sourced through the firm’s three affiliated mortgage lenders. The senior tranche of AOMT 2018-2 received an AAA rating from both Fitch and DBRS, and the weighted average credit score for the 1,096 total loans in the pool is above 700.

Fannie Mae on June 26 announced the winning bidder for its thirteenth Community Impact Pool of non-performing loans, 667 loans totaling $129.23 million in unpaid principal balance. The transaction is expected to close on August 20, 2018, and includes loans are geographically focused in New Jersey, New York, Baltimore, Maryland, Cook County, Illinois, and Miami, Florida areas. The winning bidder was VWH Capital Management, a minority woman owned business. The pool also had a weighted average note rate of 4.35%; weighted average delinquency of 30 months; and weighted average broker’s price opinion loan-to-value ratio of 99% weighted by UPB.

Fannie Mae on April 11 announced the results of its sixth reperforming loan sale transaction from nearly a month prior that included the sale of approximately 9,400 loans totaling $1.96 billion in unpaid principal balance, divided into two pools. The winning bidders were NRZ Mortgage Holdings LLC (3,015 loans; $686.4 million UPB; average loan size $227k; weighted average note rate 4.04%) and Towd Point Master Funding LLC (6,363 loans; $1.273 billion UPB; average loan size $200k weighted average note rate 3.12%). The pools were expected to close on May 24, 2018.

Fannie Mae on June 26 priced its fourth credit risk sharing transaction of 2018 under its Connecticut Avenue Securities (CAS) program, a $939.5 million note offering scheduled to settle on July 3. 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 2018-C04 consists of more than 103,000 single-family mortgage loans with an aggregate outstanding unpaid principal balance of approximately $24.7 billion. 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 27 CAS deals to market since the program began, issued $33 billion in notes, and transferred a portion of the credit risk to private investors on over $1 trillion in single-family mortgage loans.  Since 2013, Fannie Mae has transferred a portion of the credit risk on approximately $1.4 trillion in single-family mortgages through its risk transfer programs.

Fannie Mae priced its sixth Multifamily DUS REMIC in 2018 totaling $535.3 million under its Fannie Mae Guaranteed Multifamily Structures program on June 20. The M8 marks the third Green GeMS issuance of 2018 and brings the program total to $5.5 billion in GeMS backed exclusively by Green MBS through Fannie Mae’s Green Financing Business. Fannie Mae’s Multifamily Green Financing Business provides financing through several different green product offerings, encouraging apartment building owners to make energy and water savings improvements to their properties. Fannie issued over $27 billion in Green MBS in 2017.

Fannie Mae on June 11 announced that it completed its second and third traditional Credit Insurance Risk Transfer (CIRT) transactions of 2018 covering existing loans in the company’s portfolio. The two deals, which together cover $10 billion of loans, are a part of Fannie Mae’s ongoing effort to reduce taxpayer risk by increasing the role of private capital in the mortgage market. To date, Fannie Mae has acquired about $6.2 billion of insurance coverage on $254 billion of loans through the CIRT program. The new transactions transferred $311 million of risk to sixteen reinsurers and insurers. Fannie Mae will retain risk for the first 50 basis points of loss on a $9 billion pool of loans, and if the $45.2 million retention layer is exhausted, reinsurers will cover the next 300 basis points of loss on the pool, up to a maximum coverage of approximately $271 million. With CIRT 2018-3, which also became effective April 1, 2018, Fannie Mae will retain risk for the first 50 basis points of loss on a $1.3 billion pool of loans. If this $6.7 million retention layer is exhausted, an insurer will cover the next 300 basis points of loss on the pool, up to a maximum coverage of approximately $40 million.

Fannie Mae on June 12 announced the winning bidders for its thirteenth non-performing loan sale, which included approximately 9,800 loans totaling $1.64 billion in unpaid principal balance, divided among four pools. The winning bidder for the transaction was MTGLQ Investors and is expected to close on July 20, 2018. The four loan pools awarded in this most recent transaction include: (pool 1 – 2,372 loans with an aggregate UPB of $358 million; average loan size $151k; weighted average note rate 4.73%; weighted average delinquency 25 months); (pool 2 – 3,182 loans with an aggregate UPB of $478 million; average loan size $150k; weighted average note rate 5.21%; weighted average delinquency 40 months); (pool 3 – 1,403 loans with an aggregate UPB of $210 million; average loan size $150k; weighted average note rate 5.13%; weighted average delinquency 40 months); (pool 4 – 2,881 loans with an aggregate UPB of $595 million; average loan size $206k; weighted average note rate 4.60%; weighted average delinquency 39 months).

Fannie Mae on June 13 began marketing its seventh 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 27,000 loans, having a UPB of approximately $6.17 billion, with bids due July 10. Reperforming loans are mortgages that were previously delinquent, but are performing again because payments on the mortgages have become current with or without the use of a loan modification. 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. In addition, buyers must report on loss mitigation outcomes.

Freddie Mac on June 25 that it has obtained a new insurance policy under its Agency Credit Insurance Structure (ACIS) program. This is the company’s fourth stand-alone ACIS credit-risk transfer transaction, which provides a maximum limit of up to approximately $300 million of losses on single-family loans. ACIS 2018-SAP1 transfers credit risk on a $19.1 billion pool of 15 and 20-year mortgages purchased between May 1, 2017 and Feb. 28, 2018. In the first half of 2018, Freddie Mac issued an aggregate of approximately $1.2 billion credit risk transfer. Since 2013, the company has transferred a significant portion of credit risk on more than $1 trillion of UPB on single-family mortgages.

Freddie Mac on June 22 priced a new offering of Structured Pass-Through Certificates (K Certificates), which are backed by underlying collateral consisting of fixed-rate multifamily mortgages with predominantly 7-year terms. The company expects to issue approximately $930 million in K-732 Certificates, which are expected to settle on or about June 28. They also priced approximately $1.0 billion in Class-A K Certificates (K-F47 Certificates) on June 21, and approximately $1.0 billion in K-077 Certificates on June 19, expected to settle on or about June 26.

Freddie Mac on June 15 announced the pricing of the SB50 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 guarantee approximately $454 million in Multifamily SB Certificates (SB50 Certificates), which are anticipated to settle on or about June 26, 2018. Freddie Mac Small Balance Loans generally range from $1 million to $6 million and are backed by properties with five or more units. This is the sixth SB Certificate transaction in 2018. Freddie Mac is also acting as mortgage loan seller and master servicer to the trust. In addition to the six 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.

Freddie Mac on June 12 announced the pricing of $1.05 billion Structured Agency Credit Risk (STACR) 2018-DNA2 Notes, its second lower LTV deal of the year, and the second STACR transaction in which the notes are issued by a trust rather than as Freddie Mac debt. Through STACR, Freddie Mac transfers a significant portion of its mortgage credit risk on certain groups of loans to private investors. That came four days after announcing pricing for a $1.6 billion rated securitization of both guaranteed senior and unguaranteed subordinate securities. The program is designed to reduce less liquid assets in its mortgage-related investment portfolio and shed credit and market risk via economically reasonable transactions.

Turning to economic news and the bond market, inflation is something everyone likes to talk about. A little is not enough, a lot is too much – in other words, the Federal Reserve can talk about a target but can’t do much to hit it. Commerce Department figures show the price index for personal consumption expenditures in the US rose 2% in May compared with the year before, representing the first month it has reached the Federal Reserve target since April 2012. The increase has been attributed to a strong labor market pushing wages higher and generally robust economic growth.

Rates were roughly unchanged at the close of Wednesday’s shortened market hours, despite the trade war rhetoric between the world’s biggest economies worsening with President Donald Trump taking measures to prevent China Mobile from entering the U.S. market. Trading volume was light as many participants took off early or were out of the office. Markets return from the Independence Holiday today with a busy economic calendar. Data kicked off with MBA mortgage applications for the week ending June 29 (-.5%, refis at 37.2% of overall apps).

We’ve had some labor market indicators ahead of tomorrow’s nonfarm payroll reading starting with job cuts from Challenger (+18% to 37,202), followed by ADP employment (+177k, less than expected), then jobless claims (+3k to 231k). Markit nonmanufacturing is seen holding steady at 56.5, while ISM nonmanufacturing is seen increasing 0.2. The U.S. Treasury will announce the auction sizes for next week’s 3- and 6-month T-bills along with the details of next week’s mini-Refunding consisting of new 3s and reopened 10s and 30s. Finally, this afternoon we will get the minutes from the June 12/13 Fed meeting along with the reinvestment recap for the week ending July 4 which is expected to total $3.0 billion (over four days) compared with $2.6 billion in the prior week. Yes, the NY Fed continues to do that. We start with the 10-year yielding 2.86% and agency MBS prices worse nearly .125 versus Tuesday’s close.

Earlier this week: “I was offered a free trip to Giza in Egypt, but I had to get five people underneath me to sign up first. I said no thanks, it sounds like a pyramid scheme.”

Marc E. sent, “I was involved in that pyramid scheme to Giza. The guy who sold me the trip said it was all legit. It wasn’t until later that I found out Egypt me.”

Which motivated Ron B. to relay, “I also was duped by the scheme. For a long time I was in de-nile.”

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Rob Chrisman