Oct. 12: The impact of rates on lenders & servicing; Agency risk transfers continue; our changing language
Six days a week, this commentary is filled with words and phrases. New York banned the term “illegal alien”, punishable by fines. Words and phrases come and go, changing over time, usually naturally. No one likes outright censorship. Yet there have been some surprising examples of banned books in the United States, most recently in Tennessee where a Catholic school banned Harry Potter books for containing “actual curses and spells.” As a reminder, The Wonderful Wizard of Oz was banned by Chicago’s public library in 1928, partly for showing women (including witches) as leaders. Lewis Carroll’s Alice’s Adventures in Wonderland was banned in China in 1931 under an official mandate that it was wrong for animals to speak human languages. And Where’s Waldo was one of the most frequently challenged books in the U.S. from 1990 to 1999 because it included a cartoon depicting the side of a woman’s breast measuring 1/16th of an inch on the page.
There are no more “manholes” in Berkeley, California. There are, however, “maintenance” holes. The Berkeley City Council unanimously passed an ordinance replacing terms in the municipal code with gender-neutral alternatives. For example, a “sportsman” is now a “hunter,” a “bondsman” is now a “bonds-person,” “manpower” is now “human effort,” and “fraternity” and “sorority” are now “collegiate Greek system residence.” No word on eliminating “mankind.”
2,400 miles away, Atlanta Mayor Keisha Lance Bottoms signed a bill officially renaming three city streets with Confederate in their names. Confederate Avenue and East Confederate Avenue will be renamed United Avenue and United Avenue S.E., respectively, and a third street, Confederate Court, will be renamed Trestletree Court. And 500 miles from Atlanta, Charlottesville, VA, has stopped honoring Thomas Jefferson’s birthday due to him owning slaves. As a reminder, TJ was born and died in Virginia, drafted the U.S. Constitution, was the primary draftsman of the Declaration of Independence, was responsible for the Louisiana Purchase, wrote the Virginia Statute for Religious Freedom, was the 3rd president, founded the University of VA… among dozens of other notable achievements. Some believe that “political correctness” has been a cover by politicians for the lack of attention to the really pressing social-economic issues like homelessness, affordable housing, and education. Others disagree. Our language and thinking continues to change.
On to mortgage banking! How ‘bout dem rates!
“Rob, as you know, I have been in the camp of lower interest rates since December, and still feel that way. The simple story is the Central Bankers of the world, including the U.S. Federal Reserve Open Market Committee, have created a ‘house of cards by forcing investors into buying certain assets, encouraging borrowing, and so forth. Over time, the Fed will be forced to support this house of cards with lower rates. I think we will see the 10-year T-note yielding 1% within the next 6-12 months, maybe by year end. That will translate into mortgage rates of 3%, maybe a little higher.
“This will create a HUGE refi boom and great times for originators. There is no way to tell when that starts, or how long it lasts. But in this process, capacity will inevitably increase. When rates turn up, they will move very fast. Nobody in the world really wants to hold any of these bonds for the duration, just trade them for short term profits. The window to do a deal will close in 60-90 days.
“Company owners want to reap the benefits of this good market if it happens like I suggest. But they also want to do a deal to sell their company before the party is over. That is NOT going to happen. The smart guys I know are already coming up with their exit plan. I am suggesting that owners start sooner rather than later in terms of planning what they want to do. Maybe they end up giving up a little of the gravy, but can still make a lot of money and position themselves to survive a market that is going to be worse than 2018.” (If you would like to look into your options, email James Johnson or call him at 707-738-2666.)
Are rates or recession anxiety impacting MSR trades? BSI Financial Executive Vice President of Capital Markets Larry Goldstone seems to think so, saying lower rates have spelled bad news for both MSR buyers and sellers. “Sellers trying to sell their rights over the past several months have experienced what I call ‘inverse sticker shock’ with lower than expected prices. Buyers are pricing not only for realized higher prepayments, but also the potential for even lower rates, higher prepayments and rising delinquencies with the possibility of some sort of recession in the future. Declining rates are causing a lot of consternation for both MSR buyers and sellers over the past several months. Put another way, buyers have reason to be cautious in their MSR bid, but prices have been lower than expected because they’re are pricing not just for realized higher prepayments but also for the possibility for some sort of recession in the future.
“The good news? With lower rates, the pressure to sell MSRs for cash flow have diminished.
Over the past month, the market seems to be calming down and accepting the fact that lower rates may be here to stay. From a seller’s perspective, dramatically lower rates have triggered
another refinance wave that has improved profits and lessened the pressure to sell MSRs for
cash. There’s a growing acceptance that lower rates may be here to stay, and while economic data is softening, the risk of a materially bad recession seems to be declining in the minds of investors. Let’s hope they’re right.”
Agency action continues, and transferring risk is alive and well
Freddie Mac has been busy pricing multifamily security deals. On October 4, Freddie Mac priced a new $1.2 billion offering of Structured Pass-Through K-Certificates (K-098 Certificates), which are backed by underlying collateral consisting of fixed-rate multifamily mortgages with predominantly 10-year terms. The certificates are expected to settle on or about October 11, and are backed by corresponding classes issued by the FREMF 2019-K98 Mortgage Trust (K-98 Trust) and guaranteed by Freddie Mac. The K-98 Trust will also issue certificates consisting of the Class B, Class C, Class D and Class R Certificates, which will not be guaranteed by Freddie Mac and will not back any class of K-098 Certificates.
Pricing for the deal is as follows. Class A-1 has principal of $103.918 million, a weighted average life of 6.55 years, a coupon of 2.046 percent, a yield of 1.950 percent, and a $100.4955 price. Class A-2 has principal of $1,069.450 million, a weighted average life of 9.77 years, a coupon of 2.425 percent, a yield of 2.077 percent, and a $102.9936 price. Class A-M has principal of $61.001 million, a weighted average life of 9.87 years, a coupon of 2.146 percent, a yield of 2.139 percent, and a $99.9985 price. Class X1 has principal of $1,173.368 million, a weighted average life of 9.26 years, a coupon of 1.270 percent, a yield of 2.713 percent, and a $9.6369 price. Class X3 has principal of $200.945 million, a weighted average life of 9.62 years, a coupon of 2.069 percent, a yield of 4.207 percent, and a $15.9334 price. Class XAM will not be offered.
On October 3, Freddie Mac priced a new $715 million offering of Structured Pass-Through K-Certificates (K-F68 Certificates) backed by floating-rate multifamily mortgages with seven-year terms. The certificates are expected to settle on or about October 11, will not be rated, and will include one senior principal and interest class, one interest-only class, and one class entitled to static prepayment premiums. The K-F68 Certificates are backed by corresponding classes issued by the FREMF 2019-KF68 Mortgage Trust and guaranteed by Freddie Mac. The KF68 Trust will also issue certificates consisting of the Class B, C and R Certificates, which will be subordinate to the classes backing the K-F68 Certificates and will not be guaranteed by Freddie Mac. Pricing for the one offered class is as follows. Class A has principal of $715.743 million, a weighted average life of 6.54 years, a yield of 1-month LIBOR + 49 bps, and an even $100 price.
Freddie Mac Multifamily is a leading issuer of agency-guaranteed structured multifamily securities. 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 un-guaranteed subordinate bonds. K Certificates typically feature a wide range of investor options with stable cash flows and structured credit enhancement.
Fannie Mae announced and priced a new issue 18-month SOFR floating-rate corporate debt due January 29, 2021. Details of the transaction are as follows. The debt has a pricing date of July 25, a settlement date of July 29, the aforementioned January 2021 maturity date, a $2.0 billion issue size priced at SOFR plus 4 bps, and a CUSIP of 3135G0V83.
In this low interest rate environment, Fannie Mae is attempting to customize flexible portfolio structures while the market copes with high premium bonds. That being said, Fannie Mae recently priced its seventh Multifamily DUS REMIC in 2019, totaling $802 million under its Fannie Mae Guaranteed Multifamily Structures program. FNA 2019-M12, which marks Fannie Mae’s 90th GeMS deal since Fannie Mae’s trading desk began to market its own REMIC products, has a UPB of $802.41 million, collateral comprised of 58 Fannie Mae DUS MBS, a geographic distribution primarily based in CA (22 percent), PA (20 percent), VA (12 percent), a weighted average debt service coverage ratio of 1.53x, and a weighted average LTV of 67.5 percent. All classes of FNA 2019-M12 are guaranteed by Fannie Mae with respect to the full and timely payment of interest and principal. For additional information, please refer to the Fannie Mae GeMS REMIC Term Sheet (FNA 2019-M12) available on the Fannie Mae GeMS Archive page http://www.fanniemae.com/portal/jsp/mbs/mbsmultifamily/gems_archive.html
Fannie Mae announced their latest front-end deal, a new Credit Insurance Risk Transfer (CIRT) transaction that, for the first time, covers a pool of primarily Single-Family affordable loans delivered with a short-term, lender repurchase obligation (provided primarily by state Housing Finance Agencies), which serves as the initial loan credit enhancement. With CIRT LR FE 2019-1, Fannie Mae has transferred to a panel of insurers and reinsurers additional credit risk beyond that absorbed by the lender repurchase obligation, providing front-end coverage of loans to be delivered to Fannie Mae over a forward 12-month period plus bulk coverage of existing loans, together insuring up to $1.75 billion of high loan-to-value ratios. In aggregate, the transaction will transfer up to approximately $154 million of credit risk. CIRT LR FE 2019-1 secures commitments from a panel of eight insurers and reinsurers to cover up to $1.15 billion in unpaid principal balance for loans to be acquired by Fannie Mae between July 2019 through June 2020.
Additionally, this transaction covers approximately $600 million in unpaid principal balance of loans previously acquired by the company between January 2018 through August 2018. All covered loans will be originated with fixed rate notes, original terms of 21 to 30 years, and loan-to-value ratios greater than 80 percent and less than or equal to 97 percent. Fannie Mae will retain risk for the first 250 basis points of loss on the aggregate covered pool. If the approximately $43 million retention layer is exhausted, reinsurers will cover the next 880 basis points of loss on the pool, up to a maximum coverage of approximately $154 million. Coverage for this deal is provided based upon actual losses for a term of 10.5 years from the effective date of June 1, 2019. Depending on the paydown of the insured pool and the principal amount of insured loans that become seriously delinquent, the aggregate coverage amount may be reduced at the 16th month following the effective date and each month thereafter. The coverage on this deal may be canceled by Fannie Mae at any time on or after the 66th month following the effective date by paying a cancellation fee. Fannie has now committed to acquire about $9.4 billion of insurance coverage on $360 billion of single-family loans through the CIRT program to date.
On September 19, Freddie Mac priced an $1.17 K-Certificate offering (K-S12) backed exclusively by three multifamily mortgages on seniors housing properties, each with floating-rate components and, collectively, forty-nine underlying properties controlled directly or indirectly by KKR, as described in the offering documents. K-S12 is expected to settle on or about September 27, 2019. This is Freddie Mac’s twelfth K Certificate offering backed exclusively by seniors housing. The one offered class, Class A, has principal of $1.17 billion, a weighted average life of 9.69 years, a coupon of 1-month LIBOR plus 65, and an even 100 dollar price. Freddie Mac Multifamily sources its seniors housing loans from a select group of Optigo lenders with extensive experience in the seniors housing market. Freddie Mac purchases a variety of seniors housing loans including those backed by independent living properties, assisted living properties, memory care properties and senior properties with a limited amount of skilled nursing care. K-Deals are part of Freddie Mac’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. K Certificates typically feature a wide range of investor options with stable cash flows and structured credit enhancement.
On September 18, Freddie Mac priced the $364 million K-J25 deal, backed by underlying collateral consisting of supplemental multifamily mortgages. The K-J25 Certificates are backed by corresponding classes issued by the FREMF 2019-KJ25 Mortgage Trust (KJ25 Trust) and guaranteed by Freddie Mac. The KJ25 Trust will also issue certificates consisting of class B and class R certificates, which will not be guaranteed by Freddie Mac and will not back any class of K-J25 Certificates. Pricing for the two offered classes is as follows. Class A-1 has principal of $65.0 million, a weighted average life of 4.00 years, a coupon of 2.149 percent, a yield of 2.121 percent, and a $99.9994 dollar price. Class A-2 has principal of $298.855 million, a weighted average life of 5.27 years, a coupon of 2.61 percent, a yield of 2.215 percent, and a $101.9994 dollar price.
This is what we who are aged 70 or 80 years plus, can look forward to. This is something that happened at an assisted living center.
The people who lived there had small apartments, but they all ate at a central cafeteria. One morning one of the residents didn’t show up for breakfast so my wife went upstairs and knocked on his door to see if everything was OK. She could hear him through the door and he said that he was running late and would be down shortly, so she went back to the dining area.
An hour later he still hadn’t arrived, so she went back up towards his room, but found him on the stairs. He was coming down the stairs but was having a hard time. He had a death grip on the hand rail and seemed to have trouble getting his legs to work right.
She told him she was going to call an ambulance, but he told her no, he wasn’t in any pain and just wanted to have his breakfast. So, she helped him the rest of the way down the stairs and he had his breakfast.
When he tried to return to his room, he was completely unable to get up even the first stair step, so they called an ambulance for him.
A couple of hours later she called the hospital to see how he was doing. The receptionist there said he was fine, he just had both of his legs in one side of his boxer shorts.
I’m sending this to my children so that they don’t sell the house before they know all the facts.
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