Gfees Impact Mortgage Pricing; Fannie and Freddie Profits; Early Close for Bond Markets Due to Hurricane Sandy
Although the credit markets are open until noon EST, and thus rates are
moving, the Fannie Trading Desk spread the word to clients, "Due to
Hurricane Sandy, the Capital Markets Sales Desk will be closed for MBS trading
on Monday, October 29th. We will provide liquidity through our whole
loan platforms, eCommitting and eCommitONE, until 12:00 PM EST. Fannie
Mae's DC, VA, MD and PA offices will be operating with minimal staffing during
the storm. We will continue to monitor conditions to determine additional
recommendations for Tuesday. Market participants should be aware that SIFMA has
recommended a 12:00 PM EST close for the fixed income markets. Please see
the link here for SIFMA's announcement."
There is a lot going on with the agencies. (There are some Fannie &
Freddie considerations at stratmorgroup .com,
click on the link near the top right corner.) But I received this note last
week, "Rob, any truth to the rumor about Fannie closing down its gfee
related MBS business and have all the business go through its cash
window?" Darned if I know - ask your agency rep!
Seriously, remember that these agencies are trying to make a profit,
just like "private enterprises" like mortgage brokers, PHH, Wells Fargo,
whoever. Recent changes say nothing about charging lower gfees in states that
are below the national average. What about that side of the argument? I wouldn't
be surprised if that happened. But returning to the question, remember that
there are two basic ways to sell loans to the agencies: the "cash window," and
the rate sheet guarantor relationship. Both are based on pricing directly to
the securities, the delivery is somewhat similar although actual delivery
involves delivering to a different class period based on standard calendar.
Using the MBS delivery, companies can form specified pools to pick up the
pricing gain which gives them another "arrow in the execution quiver" without a
big change operationally. And it is well known that Fannie is buying more
through the cash window and forming their own specified pools, pocketing the
F&F have plenty of ways to earn money, two of which are a) higher
gfees, and b) earning additional money by taking whole loan purchases at the
cash window and placing the loans into specified pools. (Some investors will
pay higher prices for pools made up of low loan balances, high FICO's, loans in
certain states, etc.) My guess is that shutting down the gfee business entirely
is highly unlikely, but that the industry should expect to see continued
emphasis on policies and business practices that earn profits for the agencies.
Speaking of Fannie & Freddie earning profits, late last week three
different scenarios for predicting the level of additional financial support
the two of them may require from the U.S. Treasury were presented by their
conservator the Federal Housing Finance Agency (FHFA). The scenarios
updated similar projections originally released in October 2010 and updated one
year later. Here is the detail.
The projections use assumptions about GSE operations, loan performance,
macroeconomic and financial market conditions, and house prices to create
"a sensitivity analysis of future financial results to possible house
those Capital Markets folks being asked to make projections about 2013 for
other senior managers, the assumptions used in all three scenarios are worth
knowing. They include future interest rates are implied by the forward curves as
of June 30, 2012, asset-based securities and Commercial Mortgage Backed
Security prices falling by 5 points at the beginning of the period, agency MBS
spread to swaps remain unchanged, and the size of the retained portfolios are
in accordance with the terms of the Senior Preferred Stock Purchase Agreements
(PSPAs) in force between the GSEs and Treasury and additions to the retained
portfolios are limited to nonperforming loans bought out of pools backing the
GSEs MBS and PCs.
And volumes are dropping slightly: Freddie Mac bought $39 billion worth
of loans in September, which is down from its $41.3 billion purchases in
August. The agency saw its mortgage portfolio balance shrink again to an
annualized rate of 9.4% in September, according to its monthly value
summary report. Freddie continues to shrink its presence in the mortgage sector
after reducing its annualized rate of 5.5% in August and 8.7% in July, and the
unpaid principal balance on Freddie's mortgage-related investment portfolio
decreased by $5.4 billion in September. The agency's mortgage-related
securities and other guarantee commitments also saw a decrease at an annualized
rate of 10.4% in September. Single-family refinance-loan purchase and guarantee
volume stayed the same at $29.2 billion in September, representing 75% of total
mortgage portfolio purchases and issuance.
Over at Fannie Mae, it has made several changes to the offer process on
its HomePath properties, including allowing electronic signatures on offer
documents. HomePath properties are the branded name given to REO homes owned
and marketed by Fannie, and now real estate professionals and homebuyers may
now electronically sign offer documents on HomePath properties, the GSE
said in a statement Tuesday. Local Realtors may also access Fannie Mae offer
documents alongside the local sales contract in approved forms libraries
available through their MLS and real estate association. The change is not
inconsequential: in the first half of 2012, Fannie Mae sold 100,745 REO
properties; in the past 18 months, the GSE has reduced its REO holdings by 33%.
And as previously mentioned in this commentary, a little over a month
ago, the FHFA, Freddie, and Fannie announced that they would be launching a
new representation and warranty framework that would affect all conventional
loans sold or delivered on January 1, 2013. Part of the
"seller-servicer contract harmonization" initiative, the framework lets lenders
off the hook for breaching certain underwriting and eligibility representations
and warranties in cases where borrowers meet payment history requirements (36
months' consecutive timely payments) and existing "Eligible Mortgage Loan"
guidelines. The new framework also promises changes for HARP, as HARP loans
will be eligible for representation and warranty relief after a 12-month
payment history in the year following the acquisition date. Fannie and Freddie,
for their part, will be expected to review quality control earlier in the loan
process, establish a firm timeline for the submission of requested loan files,
and generally take more care to scrutinize files to ensure that they're not
defective. For lenders who wish to appeal repurchase requests, the GSEs
will also be obligated to make the process more transparent. For the full
details direct from the source, see Freddie's October 19th Bulletin (http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1222.pdf),
which provides specifics and links to various other resources.
Returning to gfee chatter, the recent changes have indeed impacted the
consumer mortgage market and MBS issuance. In addition to exerting upward
pressure on mortgage rates, the mandated increase in guaranty fees has already
impacted the conventional mortgage market by changing how loans are pooled into
TBA-eligible Fannie and Freddie MBS. Capital Markets folks know about
pooling economics, but for others: mortgage bankers have the option of pooling
loans into different MBS coupons; absent other considerations, the originator
will pool into the coupon that provides the greatest proceeds. The major
variables are 1) the market prices of the two coupons, 2) the value that the
originator places on "excess servicing" (i.e., servicing in excess of the 25
basis points of required servicing, 3) the amount of the guaranty fee, and 4)
the price (or, more accurately, the multiple) at which the GSE will allow the
originator to monetize (or "buy down") the guaranty fee.
increase in gfees has had a direct impact on pooling execution. As an
example, a loan with a 3.875% note rate can be pooled into either a
conventional 3.5% or 3% pool. Assuming that the loan's g-fee is 25 basis points
and the GSEs' buy-down multiples are 7x, best execution normally suggests that
the lender will pool into a 3.5% coupon by 1) holding 25 basis points of
required servicing and 2) buying down 12.5 basis points of g-fee at a 7x
multiple for a cost of 0.875. (Holding 25 basis points of servicing and
paying 12.5 bps of the 25 basis point g-fee from the loan's interest reduces
the remaining interest rate to the 3.5% coupon.) If the guaranty fee is
increased to 35 basis points, however, an additional 10 basis points must be
bought down at the same 7x multiple. The extra 0.70 in cost changes the
optimal execution from a 3.5% coupon into a 3% security; at the lower coupon,
none of the g-fee needs to be bought down. (However, the originator must
now either hold 27.5 basis points in excess servicing or sell it to the GSE at
a quoted "buy-up" multiple, currently around 3x.) Clear on that?
Primarily because of the very high (7x) multiples charged for gfee
buy-downs, the recent increase in gfees has incented originators to "pool down"
many loans into lower coupons. This means that Fannie and Freddie TBAs
are being backed by loans with increasingly high note rates, which will have
the effect of pushing coupons' gross WACs higher (or, put differently, widening
the spread between pools' WAC and coupon rates). All things equal, this
"WAC drift" means that pools originated late in 2012 and beyond will have
higher GWACs and will thus prepay faster, making investors increasingly
sensitive to WAC as a pool metric. This phenomenon will in turn impact MBS
Critics, and others, suggest that the GSEs should stop distorting the MBS
markets through their buy-down pricing. There is no justification for
charging originators a 7x multiple to buy down gfees while paying a 3x multiple
for servicing, which is essentially the same cash flow. Since this is
almost certainly not the last increase in gfees, the GSEs should cease using
their immense pricing powers and bring their buy-down pricing in line with
Turning to the markets, ahead of the election, and especially with the
storm, most believe that we will see a "range bound market" where 10-yr T-notes
trade between 1.83% and 1.70% this week. At the end of October, it is
becoming increasingly evident that the U.S. economy is being pulled in several
directions at once. Consumers are feeling increasingly confident, buying
houses, automobiles and other items with cheap credit. However, businesses are
growing increasingly defensive. Business fixed investment in the advance estimate
of third quarter GDP declined at a 1.3 percent annualized rate. That does not
happen in a healthy economy. And corporate profits are being challenged at
businesses with significant exposure to Europe, and to a certain extent Asia as
Real gross domestic product for the third quarter of 2012 increased at a
tepid 2% annual rate - better than the weak 1.3% real GDP growth rate of the
second quarter, but still well below potential for the U.S. economy. Prospects
for the current fourth quarter real GDP growth appear little better than for
Q3. Concern about the Fiscal Cliff is growing and media attention is
increasing, even as the presidential campaigns sprint toward Election Day. Once
election fever breaks, all eyes will focus on Congressional action, or inaction,
about the Fiscal Cliff.
It is an action-packed week for economic news this week. Good thing,
since the markets might be frozen during the run up to the election. (Sometime
I think we've been running up to this election ever since the last election.)
For today's tasty delights we have the Personal Income and Consumption duo, and
the PCE Price number. Tomorrow we'll have yet another housing indicator
(Case-Shiller, with its two month lag) and Consumer Confidence. Wednesday is
the ADP employment number (with its dubious predictive validity), the
Employment Cost Index, and the Chicago PMI. Thursday is Jobless Claims, one or
two ISM Indices, Construction Spending, some Productivity and Unit Labor costs,
and Friday is the employment data. Phew! And we could very easily have exactly
the same rates that we have this morning. In the mean time, the 10-yr has
moved down to 1.72% and MBS prices are better by about .125.
Part 3 of 3 of some humorous but true political quotes not pointed at any party:
A politician is a fellow who will lay down your life for his country.
Any American who is prepared to run for president should automatically, by
definition, be disqualified from ever doing so.
I have come to the conclusion that politics is too serious a matter to be left
to the politicians.
~Charles de Gaulle
Politics is supposed to be the second-oldest profession. I have come to
realize that it bears a very close resemblance to the first.
Politics: [Poly "many" + tics "blood-sucking
Instead of giving a politician the keys to the city, it might be better to
change the locks.
Don't vote, it only encourages them.
There ought to be one day -- just one -- when there is open season on senators.