Gosh, there is a lot of news out there. Is it accurate? When I was a kid there was a half hour, or an hour, of news each night on NBC, CBS, and ABC. Pick one. Now there are hundreds of news channels all clamoring for something to yap about. Or yap about the whatever the others are yapping about. Each political side watches what they want, and become more entrenched. Each side thinks they’re more objective than the other side. Kind of like going to prison: you’d better pick one side or the other, as those in the middle are “ridiculed” by both sides. And of course everyone sitting in some basement with an internet connection has a voice. The real estate markets and lending are much more cut and dried, where we all look at the same facts and statistics and come to the same conclusions, right? Hardly.
Property values: where to?
I received this note from Cenlar’s Glenn Freezman. “Hey Rob, I was talking to my son about the markets and shared with him your newsletter. He shot back that the sellers are pulling the homes off the market which is causing a shortage of available homes thus the bidding war. I happen to agree that we are about to see at minimum a 20% decline in the housing market; check out this story.
“I think it’s important for us to remember that lending standards have changed dramatically since December-February, and many families that were looking into buying a home then will no longer qualify for loans on the houses they had on their watch lists. They now need to come up with $100,000 down on that $500,000 home, and need a 700+ credit score and income in an environment of very high unemployment rates. They didn’t have $100k or a 700+ credit score before covid-19, so how could anyone expect them to have it after? Sure the rates are amazing and there’s an opportunity to lock in at under 3%, but that’s assuming the buyer qualifies for that loan and most no longer will. If there are fewer qualified buyers and a glut of real estate coming on the market post covid-19 supply and qualified demand would tell us prices are coming down.”
I am continuing to hear about property values holding in well. It is also important to remember that statistics need to be delved into rather than grabbing just the headline. For example, the statement, “See a minimum 20% decline in the housing market.” In price or volume? In the West, prices are doing fine, but the number of sales is down dramatically. People don’t want strangers tramping through their homes during open houses. People are going to sell and move… Where? People are hunkered down.
But families who wanted to buy homes in December, January, and February are still wanting to buy a home. Now rates are even better! And there are reports of people, putting up with the father/mother and two kids in two-bedroom apartment, wanting even more to buy a place with a yard. Let us out! Lastly, plenty of people like me are waiting for a downturn to buy another rental house or two. I don’t think that the demographics point to a 20% decline in prices of typical houses. Now, are some markets inflated? You bet. Would I pay $1.3 million for a 3-bedroom, 2 bath place in San Jose. Heck no! They can certainly come down. But $500k for the same house on a lake in Duluth? I don’t see that dropping to $400k.
Sentiment and expectations about near-term economic growth play an important role in how consumers spend and businesses invest. The pandemic has led to a sharp turnaround in the economic outlook, as consumers and policymakers grapple with the economic impact amid policy uncertainty in Washington D.C. and across individual states, a rapidly deteriorating labor market, and volatility in financial markets. While confidence evaporated in the face of the pandemic, it is unclear how quickly it will return. Barring a second wave of infections, the pace of recovery will depend on people’s willingness to return to their normal economic lives as shutdown orders are lifted across the country. Remember, the Great Recession took about six years for things to return to normal. Of course, the financial crisis a decade ago and the health crisis we face at present are different in a number of ways, sentiment will likely help dictate how quickly we are able to recover.
The “sun is setting” on LIBOR (London Interbank Offered Rate, the rights of which are owned by ICE, the same company that owns MERSCORP) by the end of 2021, and won’t be guaranteed to be supported. Fannie and Freddie have launched new websites with key resources for lenders and investors.
The New York Federal Reserve published a piece on best practices for the transition. The Alternative Reference Rates Committee recommends market participants begin accelerating their transition efforts, as Libor is due to wind down in just 19 months. The committee published a list of best practices to aid in the completion of a successful transition. “As evidenced by this set of best practices and recommended transition milestones, it is critical that market participants continue to make progress on executing a complete transition away from Libor by the end of 2021,” said Tom Wipf, chairman of ARRC and vice chairman of institutional securities at Morgan Stanley.
Disruption caused by the coronavirus pandemic demonstrates that phasing out Libor as a reference interest rate brings benefits for corporate borrowers, regulators say. Risk-free rates decline during a crisis because they are closely linked to rate cuts implemented by central banks, while Libor rises in such times because it is based on a mix of central bank rates and bank credit risk, they say.
Fannie Mae LIBOR Transition Website is LIVE! https://www.fanniemae.com/portal/funding-the-market/libor/libor-transition.html
And Freddie Mac launched a new website providing key resources for lenders and investors as the company transitions from the London Interbank Offered Rate (LIBOR). The announcement comes alongside announcements made by the Federal Housing Finance Agency (FHFA) and Fannie Mae.
But earlier in May lenders were relieved the Bank of England had pushed back the timetable for phasing out Libor as an interest-rate benchmark for loans. “It has been clear for some time that loans would be one of the trickiest areas of the market to transition from an operational point of view,” ING rates strategist Antoine Bouvet says.
Risk transfer & capital markets deals
The Agencies (aka Freddie and Fannie) continue to help that process in both the primary and secondary markets, hoping to achieve competitive pricing in the secondary market while limiting risks borne by taxpayers. Along those lines, billions of dollars of conforming conventional loans have been bundled into CRT (Credit Risk Transfer) bond deals, nonperforming, or multifamily deals, which help reduce taxpayer exposure to the large book of mortgages guaranteed by the two housing giants and help the Agencies manage their capital.
These deals involve sharing part of the credit risk with third party investors – for a price. In the deals, the investors pay cash up front and purchase debt securities that are designed to absorb the credit losses on GSE (government sponsored enterprises) loan pools. The goal is to attract private capital into the mortgage market and shift some risk away from taxpayers since we are currently on the hook for Freddie & Fannie. And that helps rate sheet pricing for borrowers!
Since the Federal Housing Finance Agency (FHFA) launched a credit risk transfer program for Fannie Mae and Freddie Mac in 2013, the enterprises have transferred $115 billion in credit risk to private investors, amounting to about 3.3 percent of unpaid principal balance, per the FHFA. In 2019, the GSEs transferred $24 billion worth of credit risk. Transfers included debt issuances, insurance and reinsurance transactions, senior-subordinate securitizations, and several kinds of lender-collateralized recourse transactions. Click here to read the credit risk transfer progress report (although for the fourth quarter, it gives you a solid grounding in the process).
Let’s see what Freddie Mac has been up to.
Freddie Mac’s Single-Family business announced that its Credit Risk Transfer (CRT) transactions transferred $5.1 billion of credit risk on $140.7 billion of single-family mortgages from U.S. taxpayers to the private sector in the first quarter of 2020. This protects those nearly $141 billion of mortgages by transferring credit risk away from U.S. taxpayers to global private capital via securities and (re)insurance policies. The Q1 2020 CRT issuance significantly exceeded Q1 2019 totals, largely due to an effort to accelerate the time from a loan’s acquisition to its placement in a CRT reference pool. Through its flagship offerings, Freddie Mac issued approximately $4.5 billion across seven CRT transactions in Q1 2020. Since the first CRT transaction in 2013, Freddie Mac’s Single-Family CRT program has cumulatively transferred a portion of the credit risk on $1.6 trillion in mortgages. As of March 31, 2020, 51 percent of the Single-Family credit guarantee portfolio was covered by CRT transactions, and conservatorship capital needed for credit risk on this population was reduced by approximately 75 percent through these transactions.
In February, Freddie Mac priced a new $580 million offering of Structured Pass-Through K-Certificates (K-HG2 Certificates), backed by a fixed-rate multifamily mortgage loan on 16 properties indirectly controlled by Harbor Group International, LLC, or its affiliates. K-HG2 is expected to settle on or about March 6, 2020. The K-HG2 Certificates will not be rated, and will include two senior principal and interest classes and one interest only class. The K-HG2 Certificates are backed by corresponding classes issued by the FREMF 2020-KHG2 Mortgage Trust (KHG2 Trust) and guaranteed by Freddie Mac. Pricing for the deal is as follows. Class A-1 has principal of $67.080 million, a weighted average life of 7.53 years, a coupon of 1.916 percent, a yield of 1.83428 percent, and a $100.4944 price. Class A-2 has principal of $513.306 million, a weighted average life of 9.97 years, a coupon of 2.299 percent, a yield of 1.9595 percent, and a $102.9923 price. Class X, the interest only class, has principal of $580.386 million, a weighted average life of 8.90 years, a coupon of 0.40572 percent, a yield of 2.37815 percent, and a $2.6863 price. The transaction collateral is part of Freddie Mac’s single-asset, single borrower (SASB) execution. The SASB execution transfers first loss credit risk on either one or multiple properties owned or controlled by a single sponsorship group.
In April, Freddie Mac priced a new $1 billion offering of Structured Pass-Through K Certificates (K-107 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 of $65.100 million, a weighted average life of 6.57 years, a coupon of 1.228 percent, a yield of 1.13936 percent, and a $100.4945 price. Class A-2 has principal of $827.317 million, a weighted average life of 9.63 years, a coupon of 1.639 percent, a yield of 1.2996 percent, and a $102.9965 price. Class A-M has principal of $118.898 million, a weighted average life of 9.82 years, a coupon of 1.652 percent, a yield of 1.31873 percent, and a $102.9929 price. The K-107 Certificates are expected to settle on or about April 23, 2020.
In February, Freddie Mac priced a new $1.2 billion offering of Structured Pass-Through K-Certificates (K-104 Certificates), which are backed by underlying collateral consisting of fixed-rate multifamily mortgages with predominantly 10-year terms and settled on February 27. Pricing for the deal is as follows. Class A-1 has principal of $153.60 million, a weighted average life of 6.92 years, a 1.938 percent coupon, a 1.84783 percent yield, and a $100.4986 price. Class A-2 has principal of $1,019.54 million, a weighted average life of 9.97 years, a coupon of 2.253 percent, a yield of 1.90682 percent, and a $102.9999 price. Finally, Class A-2 has principal of $70.496 million, a weighted average life of 9.91 years, a coupon of 1.955 percent, a yield of 1.94886 percent, and a $99.9958 price. 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 un-guaranteed subordinate bonds. K Certificates typically feature a wide range of investor options with stable cash flows and structured credit enhancement.
Also in February, Freddie Mac priced a new $870 million offering of Structured Pass-Through K-Certificates (K-F75 Certificates), which includes a class of floating rate bonds indexed to the Secured Overnight Financing Rate (SOFR) which settled in early March. The K-F75 Certificates are backed by floating-rate multifamily mortgages with 10-year terms, which are currently LIBOR-based. K-F75 includes one class, Class AL, of senior bonds indexed to LIBOR. Class AL has principal of $570.860 million, a weighted average life of 9.53 years a coupon of 1-month LIBOR plus 51 bps, and an even $100.00 price. K-F75 includes another class, Class AS, of senior bonds indexed to SOFR. Class AS has principal of $300.00 million, a weighted average life of 9.53 years, a coupon of 1-month average SOFR plus 55 bps, and an even $100.00 price. 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 structure is similar to K-F73, which priced in December 2019.
“Sarcasm will get you nowhere in life,” my boss told me.
“Well, it got me to the ‘International Sarcasm’ finals in LaPlante, Indiana in 2009,” I informed him.
“Really?” he asked.
“No,” I replied.
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, “Reducing Friction”, focused on operations changes. If you have the inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
(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.)
Source: Rob Chrisman
- Aug. 6: Cap. mkts., U/W, AE, LO jobs; risk tool; webinars & training; servicing & MSR update; rates continue lower - August 6, 2020
- Aug. 6: Cap. mkts., U/W, AE, LO jobs; risk tool; webinars & training; servicing & MSR update; rates continue lower - August 6, 2020
- Aug. 5: Ops, AE jobs; Analytic, business practice, income, compliance products; renewing the non-QM segment - August 5, 2020