Daily Mortgage News & Commentary

Nov. 28: Letters about improving processing and AMCs transferring appraisals; SOFR, LIBOR, and ARM news

2020 isn’t over yet… we still have December. Tiger King, global pandemic, a U.S. president who says that the election isn’t over, fires and floods, and now minks rising from graves in Denmark. Fortunately talk of a fast release for the GSEs seems to be diminishing. No one saw the combination of all of this coming at us, and although no one has a crystal ball when it comes to rates and dates in the future, the consensus is that the world economies are following the virus around the world. Consumer spending and housing drive the lion’s share of the U.S. economy, and if you’re out of a job you’re probably trying not to spend much money. Likewise, even if borrowing costs are near 0 percent, a company won’t have a need for borrowing if they’re not expanding. While all of this is happening on a global basis, lenders are dealing with nitty-gritty details while wrapping up (for many) a record-breaking month and year.

Can an AMC refuse to transfer an appraisal to a new lender?

This was a recent question from a reader, and I turned to Matthew Simmons at AXIS AMC for an answer. “The role of the AMC is to manage the ordering process in compliance with Appraiser Independence Regulations (A.I.R) for the Lender (i.e., the Intended User) when an order is placed. Once the order is completed and delivered to the original Lender (again, the Intended User), the role of the AMC is complete.

 

“Should the original Lender (Intended User) not wish to complete the transaction for the borrower, or the borrower decides to changed Lenders, then the decision on what to do with the previously completed reports is between the original Lender and the new Lender. At which point a couple things can happen. 1) Lender A (Original Intended User) releases the report to the new Lender B with a transfer letter that states something along the lines of “We (Lender A) release this report for the use with your new company (Lender B)”. At this point the new Lender (Lender B) must accept the report in its current state and fund in the original Lender’s name.

“Or 2) If the new Lender will NOT accept a transferred report because the new Lender B NEEDS the report to reflect their name as the Intended User, then a new report will need to be completed for the new Lender with a new inspection (effective date). The reason a new inspection is required is because the appraiser cannot take their old report and change who the Intended User was when they originally inspected. That appraisal does not ‘belong’ to the appraiser. The effective date of an appraisal is a literal “snapshot in time”.  Thus a new effective date is required for a new Lender name.

“Lastly, 3) It’s likely that if the report was completed recently and you were to use the same AMC (and that AMC is on the NEW Lender’s approved list of AMC’s) they might be able to get the original appraiser to complete a new report for you quickly and even potentially at a discount. Many appraisers, however, treat any such request as a completely new assignment (with all the insipient liability) and, as such, may require a full fee.”

Matthew’s note finished with, “In summary, an AMC is quite literally barred from asking the appraiser to change the name of the intended user from lender A to Lender B even with a transfer letter. It becomes a new assignment for a new Intended User which requires a new effective date with its own scope of work.” Thank you, Matthew!

 

Processing: reducing friction

Efficient processing can make or break a company. A recent STRATMOR workshop found that processing is currently the #1 bottleneck in operations. And every ops manager person says that bringing new processors up to speed remotely is difficult. (Underwriting and closing closely follow.) How are lenders managing capacity constraints, one of the biggest “pain points” for lenders? A recent STRATMOR poll indicated that overtime, shifting staff from other parts of the company, or adjusting the workflow process are popular solutions.

Joey McDuffee, VP of Sales and Marketing at Blue Sage, weight in on cutting closing times. “Rob, companies still have challenges creating a unified, real-time experience across the board for loan officers, borrowers, and back office operations staff because the systems they use are so dissimilar. Tying all of these together seamlessly is a major opportunity to reduce cycle times. The key is leveraging modern technology and access to a variety of data sources to create a holistic experience that includes workflow orchestration and automating processes between the borrower, the lender, and key third-party data services. That level of instantaneous transparency between the borrower, loan officer, and underwriter allows lenders to approve loans faster than they ever have before. We’ve seen clients shrink app-to-close turnaround times to 14 days simply by creating that simplified, data-driven experience for all involved with the origination process.”

Paul Anselmo, CEO of Evolve Mortgage Services, wrote in, “Rob, a huge shortage of underwriters in an industry experiencing historic levels of business is causing massive logjams. One strategy that can help mortgage bankers better handle the tsunami of activity is to bifurcate the loan production process so underwriters have fewer tasks on their plate. By breaking down the process into multiple functions, underwriters are freed up to underwrite more files per day. Using a good bifurcation platform enables lenders to be as much as four-to-five times more profitable.” (Find out how Evolve uses bifurcation to help lenders scale up their underwriting at www.evolvemortgageservices.com.)

And Nate Johnson, mortgage business head for SLK Global Solutions, sent, “Rob, the biggest production bottlenecks we see are in pre-underwriting and loan setup. We have found that the loan quality is the main driver to cut closing times by reducing the number of times an underwriter touches a file. Improving loan quality can be done through smart process reengineering and by automating communications, such as automated communication to both borrowers for updated paystubs and processors to identify deficiencies prior to underwriting. For one of our clients, we were able to slash the number of touches from nearly six to just two.” (Read more about how SLK helps lenders reduce production costs here.)

LIBOR & ARMs

The slope of the yield curve (for example, the difference between 3-month and 30-year securities) changes every day. Treasury curve is opening up slightly steeper, 2/30s .49 and 10s/2s .19. Not exactly a reason for ARMS traders to get excited about upcoming supply from mortgage bankers but the higher we go and the steeper we get… you all know the drill. The benefits for MBS investors in purchasing ARMS are a lower duration profile, higher interest rate payments and greater yield as the underlying mortgage resets down the road. I remember the days when ARM production was as high as 40% of origination pipelines, excluding bank lenders it’s single digits percentage wise best case these days.

It is widely expected that LIBOR will be discontinued or deemed unsuitable for use by the end of 2021. (And we’re already fast approaching the end of 2020!) Banks and other financial institutions should be implementing plans to transition to replacement rates. Decisions regarding an appropriate replacement rate should take into account impacts on the financial condition of the institution, impacts on borrowers, and operational challenges associated with different replacement rates.

Fannie’s trading desk reminded clients that Dec. 1 will be the last issue date for MBS pools with LIBOR ARMs (loans can be delivered into MBS with Dec. 1 issue dates until Dec. 24.). Dec. 31 will be the last day Fannie Mae will purchase LIBOR ARMs on a whole loan basis.

Finastra launched a LIBOR Transition calculator that enables market participants to calculate their own Alternative Reference Rates (ARR) or Risk-Free Rates (RFR) and interest accruals. Fusion LIBOR Transition Calculator enables market participants to calculate their own ARR / RFR based rates and interest accruals. This calculator will help these global financial titans quickly implement a solution and make up for lost time. Finastra provides loan pricing and valuation software to more than 80 of the world’s biggest financial firms.

Here’s a summary of the transition from LIBOR in U.S. securitizations.

Bloomberg is building a credit adjustment that banks can layer on top of the Secured Overnight Financing Rate that “reflects the marginal cost of funding for the banks,” says Umesh Gajria, global head of index-linked products. “We’re working closely with several clients in the market, continuing to solicit feedback and continuing to refine the index, so we will be coming out with more information on that shortly,” Gajria says.

Earlier this month the Federal Reserve, FDIC, and OCC issued a statement to clarify certain elements of the transition away from LIBOR and reiterate that they are not endorsing a specific replacement rate for LIBOR with respect to lending activities, and that the use of the Secured Overnight Financing Rate (SOFR) is voluntary. The agencies further reiterated that banks should institute fallback contract language that provides for a robust fallback rate.

And deals keep being generated with adjustable rate indices.

Earlier this year Freddie Mac priced a new $850 million offering of Structured Pass-Through K Certificates (K-F77 Certificates), which includes a class of floating rate bonds indexed to the Secured Overnight Financing Rate (SOFR). The K-F77 Certificates are backed by floating-rate multifamily mortgages with 7-year terms, which are currently LIBOR-based. Freddie Mac will provide a basis risk guarantee on Class AS that covers any floating interest rate basis risk if the value of SOFR exceeds the value of LIBOR. Pricing for the deal is as follows. Class AL has principal of $536.618 million, a weighted average life of 6.59 years, a coupon indexed to 1-month LIBOR plus 70 bps and an even $100.00 price. Class AS has principal of $250.000 million, a weighted average life of 6.59 years, a coupon indexed to 1-month average SOFR plus 90 bps and a $100.00 price.

 

And Freddie Mac priced a similar new offering of Structured Pass-Through K Certificates. This $853 million K-F78 transaction also included a class of floating rate bonds indexed to SOFR. The K-F78 Certificates are expected to settle on or about April 16 and are backed by floating-rate multifamily mortgages with 10-year terms, which are currently LIBOR-based. Like K-F77, K-F78 includes one class (Class AL) of senior bonds indexed to LIBOR and another class (Class AS) of senior bonds indexed to SOFR. As with K-F77, Freddie Mac will provide a basis risk guarantee on Class AS that covers any floating interest rate basis risk if the value of SOFR exceeds the value of LIBOR. Pricing for the deal is as follows. Class AL has principal of $697.7 million, a weighted average life of 9.54 years, a coupon of 1-month LIBOR plus 80 bps, and a $100.00 price. Class AS has principal of $155.5 million, a weighted average life of 9.54 years, a coupon indexed to the 30-day SOFR average plus 100 bps, and a $100.00 price.

In late September, Freddie priced another K Certificates deal, which is known for featuring a wide range of investor options with stable cash flows and structured credit enhancement. This new $968 million offering of K-F85 Certificates includes a class of floating rate bonds indexed to the Secured Overnight Financing Rate (SOFR). The other class of senior bonds is indexed to LIBOR, and Freddie Mac will provide a basis risk guarantee on Class AS that covers any floating interest rate basis risk if the value of SOFR exceeds the value of LIBOR. The K-F85 Certificates are backed by floating-rate multifamily mortgages with 10-year terms, which are currently LIBOR-based, and are expected to settle on or about September 30, 2020. Class AL has $518.694 million of principal, a weighted average life of 9.38 years, a coupon of 1-month LIBOR plus 30 bps, and a $100.00-dollar price. Class AS has $450.000 million of principal, a weighted average life of 9.38 years, a coupon of the 30-day SOFR average plus 33 bps, and an even $100.00-dollar price.

Freddie Mac also priced a new $828 million offering of Structured Pass-Through K Certificates (K-F81 Certificates), which includes a class of floating rate bonds indexed to the Secured Overnight Financing Rate (SOFR). K-F81 includes one class (Class AL) of senior bonds indexed to LIBOR and another class (Class AS) of senior bonds indexed to SOFR. Freddie Mac will provide a basis risk guarantee on Class AS that covers any floating interest rate basis risk if the value of SOFR exceeds the value of LIBOR. The K-F81 Certificates are backed by floating-rate multifamily mortgages with 7-year terms, which are currently LIBOR-based. Class AL has a principal of $378.375 million, a weighted average life of 6.45 years, a coupon of 1-month LIBOR + 36 bps, and a $100.00 price. Class AL has a principal of $450.000 million, a weighted average life of 6.45 years, a coupon of 30-day SOFR average + 40 bps, and an even $100.00 price. The K-F81 Certificates settled in July.

Freddie Mac announced that it priced its $1.1 billion STACR 2020-DNA4 offering, which saw an increased planned size of the bond issuance due to investor demand, the third upsized STACR offering since March. STACR (Structured Agency Credit Risk) is part of Freddie Mac’s flagship credit risk transfer program. STACR REMIC 2020-DNA4 is Freddie Mac’s fourth securities transaction of the year covering single-family loans with low loan-to-value ratios between 61 percent and 80 percent. The loans were securitized between January 1, 2020 and March 31, 2020 and originated on or after January 1, 2015. Pricing for STACR REMIC 2020-DNA4 is as follows: M-1 class: one-month LIBOR plus a spread of 150 bps. M-2 class: one-month LIBOR plus a spread of 375 bps. B-1 class: one-month LIBOR plus a spread of 600 bps. B-2 class: one-month LIBOR plus a spread of 1000 bps. STACR REMIC 2020-DNA4 is scheduled to close August 25 along with its ACIS counterpart. Since 2013, Freddie Mac has transferred a portion of credit risk on approximately $1.7 trillion in unpaid principal balance on single-family mortgages.

Black Friday: Only in America do people trample others for cheap goods just hours after being thankful for what they already have.

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