Nov. 14: Appraisal fee changes; Credit Risk Transfers help rate sheet pricing: current thinking & examples of secondary deals
We have twelve days until Thanksgiving, first celebrated in the fall of 1621 when the Pilgrims gathered, back when we were allowed to gather, to hold a three-day feast celebrating a bountiful harvest. But it did not become a national holiday until 1863 when President Abraham Lincoln proclaimed the last Thursday of November as a national day of thanksgiving. Later, President Franklin Roosevelt clarified that Thanksgiving should always be celebrated on the fourth Thursday of the month to encourage earlier holiday shopping (very crafty). Big family gatherings are not the norm this year, but the 2,500 turkey farms in the U.S. raise about 229 million gobblers every year. Minnesota is numero uno in turkey production with almost 1/5 of the national tonnage. North Carolina and Arkansas tie for 2nd at around 30 million turkeys each, and adding in production from Missouri, Virginia, and Indiana accounts for two-thirds of U.S turkeys. This year smaller turkeys or turkey parts will be the norm. On to mortgage origination!
According to FBX | Informa Financial Intelligence, October 2020 mortgage rate-lock volume was up 65% year over year (YoY) and 3% month over month (MoM) across all channels, while funded volume increased 34% YoY and 4% MoM. In the retail channel, lock volume increased 63% YoY and 3% MoM, while funded volume was up 50% YoY and 4% MoM. The average 30-year conforming retail funded rate in October was 3.02%: who can argue with that rate? It is nearly 1 percent lower than the same month last year.
Not every lock results in a funding, and despite the appreciation in every housing market in the United States, sometimes loans hit snags during the appraisal. The Knowledge Coop’s Ken Perry weighed in appraisal fee changes. “I was teaching a CE class yesterday and ran straight into a pretty big issue. The class said that when they quote an appraisal fee and the appraisal comes back higher for no reason, they are being told to redisclose the new fee within 3 days as if there were a changed circumstance. It sounds like the industry needs a quick reminder that the appraisal fee is a zero-tolerance fee. Unless there is something that comes up in the process, i.e., needs a reinspection because the roof is leaking, then there is not a compliant way to raise the fee to the consumer. The lender needs to eat that fee. The appraiser charging more doesn’t constitute a changed circumstance.
“This was such a big issue in class. Most of the people in the room who broker loans were stating that the wholesale lenders are requiring the broker to raise the fee to the consumer. If you add up all of the loans where this has happened it seems like there could be a pretty fat settlement when the new CFPB director takes over. Cordray actually went after a company for overcharging on appraisals back in 2014. Total settlement was $19.3 million for overcharging on appraisals, fee splitting, and illegal advertising, including a $1.5 million fine directly to the owner. I think we have forgotten what it’s like to work under the eye of an aggressive CFPB. Could be an interesting year!” Thank you, Ken!
CRT & Agency deals
Credit Risk Transfers are essentially insurance-linked securities on a large, diversified, pool of known mortgages. The securities are “tranched” (split up based on common attributes) to form different risk/return profiles (e.g. probability of loss vs. interest to investors). It is very similar to how Non-Agency RMBS (residential mortgage-backed securities) work: CRTs aggregate and distribute principal repayment and loss cash flows of the underlying pool of mortgages to the bonds based on a set of rules, with the most senior bonds getting repaid first via underlying mortgage principal paydown, and the most junior bonds exposed to default risk first via losses.
Andrew Netter, Senior Financial Consultant with Milliman wrote, “For investors, they are purchasing a bond from Freddie/Fannie. The bond is backed by a pool of mortgage loans, acquired from mortgage originators through the standard process. The securities are structured in a manner where credit losses are passed through to bond holds. In return, the GSEs (Government Sponsored Enterprises) transfer a portion of the guarantee fee to the bond investors.
“For instance, for the Freddie Mac STACR REMIC Trust 2020-DNA5, the structure includes WAL and Principal Window to 10-yr early redemption at 10CPR, 0CDR). In this instance, the bonds principal repayment is linked to the performance of a pool of 149,424 mortgages (loan tape is distributed to investors during marketing). For example, the B2 bond principal is eaten away by losses from 10bps to 75bps (e.g., if ultimate reference pool losses are less than 0.1% of the issuance principal balance of the 149,424 mortgages, the full principal is repaid, if losses are greater than 0.75%, none of the principal is repaid – and partial is repaid if losses are in that window). As you inferred, the first 10bps of loss is retained by Freddie Mac to align interests and give the B2 some credit enhancement.”
Andrew went on. “If investors think the reference pool will perform strongly (i.e., little loss as a % of issuance UPB), they can achieve attractive returns (here is a link to past Freddie Mac CRT pricing). And here is a link to a recent piece I wrote on the topic: The GSE CRT market reopens post COVID-19 disruption: A new normal? Or more troubles on the horizon? Lastly, page 2 of this pdf from Semper Capital (although a bit dated) gives some good Pros/Cons from investor perspective.
Ed DeMarco, who ran the FHFA several years ago, had some thoughts on the Financial Stability Oversight Council’s comments on the Federal Housing Finance Agency’s proposed capital rule. “The Financial Stability Oversight Council’s recent comments on the Federal Housing Finance Agency’s proposed capital rule for Fannie Mae and Freddie Mac reinforced aspects of the proposed rule but left market participants uncertain about key issues. “Market participants are concerned with FHFA’s and FSOC’s intentions with credit risk transfer, a critical housing finance reform made in conservatorship. By selling credit risk to investors, CRT diversifies the sources of private capital and broadens the universe of investors that absorb credit losses. CRT investors monitor and assess mortgage credit risk so the financial system is not solely reliant upon the risk management judgments of the GSEs. Further, CRT permits pricing transparency previously absent in the GSE market.
“CRT should reduce the GSEs’ required risk-based capital since the risk is transferred away, with CRT investors providing the capital backstopping the transferred credit risk. Yet, FHFA’s proposal provides meager capital reduction for CRT. If capital relief is limited, the overall cost of capital – equity plus CRT – would increase, thereby removing the incentive for CRT.
“Since FSOC’s duty is identifying and reducing systemic risk, FSOC should be a strong CRT proponent. Indeed, Treasury Secretary Mnuchin and Fed Chairman Powell repeatedly have supported CRT as an effective means to transfer risk from the GSEs.
“Surprisingly, FSOC makes no mention of CRT in its formal statement. Surely this panel of regulators understands that FHFA’s proposed rule would render CRT ineffective and that, without CRT, the market would revert to the previous concentration of risk in and opacity of pricing by the GSEs.
“FSOC doesn’t address FHFA’s reservations with CRT, as expressed in the proposed rule, where FHFA notes CRT’s limitations compared to common equity. Yet, Fannie Mae’s and Freddie Mac’s failure in 2008 arose from their underpricing and under-estimating credit risk, combined with insufficient capital. They retained almost all credit risk on nearly $5 trillion of mortgages. CRT, like the reinsurance market, uses market mechanisms to distribute rather than warehouse credit risk.
“FHFA has the authority to correct shortcomings it sees with CRT structures used today, if any. If it sees problems with CRT, it should make them clear and work with market participants to find solutions. FHFA’s and FSOC’s goal should be prudent levels of both equity capital and CRT. This would enable the Enterprises to benefit from the unique loss absorbing and risk mitigating features of both while reducing the cost and increasing the efficiency of capital.
“In sum, CRT can reduce both systemic risk and the amount of common equity to be raised while expanding the investor base focused on mortgage credit risk. It should also lower the GSEs’ overall cost of capital, thereby lowering mortgage rates for homebuyers.” Thank you, Ed.
Deals, and demand, in the secondary markets drive rate sheet prices for borrowers. Let’s take a random sample of what Freddie Mac has been up to in this segment of our market.
In mid-summer Freddie Mac priced a new $895 million offering of Structured Pass-Through K Certificates (K-1516 Certificates), which are multifamily mortgage-backed securities. Class A-1 has a principal of $144.300 million, a weighted average life of 10.16 years, a spread of S+62, a coupon of 1.238 percent, a yield of 1.23262 percent, and a $99.9984 price. Class A-2 has a principal of $751.239. million, a weighted average life of 14.74 years, a spread of S+74, a coupon of 1.721 percent, a yield of 1.49072 percent, and a $102.9927 price. Co-Lead Managers and Joint Bookrunners on the deal are Credit Suisse Securities and Amherst Pierpont Securities, while Co-Managers on the deal are Barclays Capital, Citigroup Global Markets, Mizuho Securities and Stern Brothers & Co.
This summer, Freddie Mac priced a new $1.1 billion offering of Structured Pass-Through K Certificates (K-112 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 a principal of $86.843 million, a weighted average life of 6.70 years, a spread of S+39, a coupon of 0.799 percent, a yield of 0.79285 percent, and a $99.9953 price. Class A-2 has a principal of $963.300 million, a weighted average life of 9.76 years, a spread of S+42, a coupon of 1.311 percent, a yield of 0.98173 percent, and a $102.9945 price. Class A-M has a principal of $138.092 million, a weighted average life of 9.82 years, a spread of S+47, a coupon of 1.039 percent, a yield of 1.03456 percent, and a $99.9929 price.
In 2020 Freddie Mac priced a $1 billion offering of Structured Pass-Through K Certificates (K-106 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 principal do $135.929 million, a weighted average life of 7.41 years, a coupon of 1.783 percent, a yield of 1.70011 percent, and a $100.4974 price. Class A-2 has principal of $852.000 million, a weighted average life of 9.79 years, a coupon of 2.069 percent, a yield of 1.72748 percent, and a $102.9939 price. Finally, Class A-M has principal of $54.548 million, a weighted average life of 9.90 years, a coupon of 1.779 percent, a yield of 1.77289 percent, and a $99.9959 price.
This autumn Freddie Mac priced a new $1.2 billion offering of Structured Pass-Through K Certificates (K-115 Certificates), which are backed by underlying collateral consisting of fixed-rate multifamily mortgages with predominantly 10-year terms. The K-115 Certificates are expected to settle on or about September 18. 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. Pricing for the deal is as follows. Class A-1 has a principal of $88.088 million, a weighted average life of 6.55 years, a spread of S+28, a coupon of0.743 percent, a yield of 0.73720 percent, and a $99.9947 price. Class A-2 has a principal of $984.042 million, a weighted average life of 9.72 years, a spread of S+37, a coupon of 1.383 percent, a yield of 1.05079 percent, and a $102.9989 price. Class A-M has a principal of $140.984 million, a weighted average life of 9.80 years, a spread of S+42, a coupon of 1.111 percent, a yield of 1.10557 percent, and a $99.9999 price.
Recently Freddie announced the pricing of the SB78 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 issue approximately $368 million in SB78 Certificates, which are expected to settle on or about September 18, 2020. Freddie Mac Small Balance Loans generally range from $1 million to $7.5 million and are generally backed by properties with five or more units. This is the ninth SB Certificate transaction in 2020. Pricing for the deal is as follows. Class A-5H has a principal of $148.108 million, a weighted average life of 4.06 years, a spread of 40 bps, a coupon of 0.82 percent, a yield of 0.6827 percent, and a price of $100.4975. Class A-10F has a principal of $82.992 million, a weighted average life of 7.13 years, a spread of 44 bps, a coupon of 1.02 percent, a yield of 0.9418 percent, and a $100.4803 price. Class A-10H has a principal of $137.667 million, a weighted average life of 7.10 years, a spread of 54 bps, a coupon of 1.12 percent, a yield of 1.0392 percent, and a $100.4889 price. The Optigo Small Balance Loan (SBL) origination initiative was first announced in October 2014, and expands the company’s continuing effort to better serve less populated markets and provide additional liquidity to smaller apartment properties.
In 2020 Freddie Mac Multifamily added to its lineup of Impact Bonds Offerings, announcing it has gone to market with its first structured Social Bonds deal. The proceeds of Freddie Mac’s Social Bonds are used either to provide liquidity to social impact financial institutions for financing of affordable housing or to finance multifamily properties originated by the Freddie Mac Multifamily Optigo network that are affordable to an underserved population. Proceeds from the underlying loans are used to finance rental properties in 28 states that serve low- to very low-income residents. Out of approximately 4,500 rental units, about 2,900 are home to people with very low incomes who make 50 percent or less of the area median income. The inaugural Social Bonds structured transaction is a REMIC – FHMR 2020-P003- issuance backed by a pool of Multifamily PCs. Freddie Mac conducted a full underwriting and due diligence review of all the loans and confirms the loans were underwritten to Freddie Mac’s credit standards.
A man buys a parrot, only to have it constantly insult him. He tries everything to make the parrot stop, but nothing works.
Frustrated, the man puts the parrot in the freezer. After a few minutes, the insults stop.
The man thinks he might have killed the parrot, so he opens the freezer and takes the parrot out.
The parrot is shivering. It stammers, “S-s-sorry for being r-r-rude. Please f-f-forgive me.”
Then, after a moment, the parrot softly asks, “W-w-what exactly d-d-did the turkey do?”
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, “Time to Call the Landlord?”.
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. This newsletter is designed for sophisticated mortgage professionals only. There are no paid endorsements by me. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2020 Chrisman LLC. All rights reserved. Occasional paid job & product listings do appear. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Rob Chrisman.)