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Ansel Caine

Ansel Caine

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Ansel Caine

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  1. THE CHANGING LANDSCAPE FOR MORTGAGE SERVICING SERVICING ADJUSTMENTS NEEDED FOR BEST EXECUTION AND TBA Ansel Caine Friday, April 5, 2013

  2. Topics • MBS Secondary Market / TBA Overview • Adjusting Servicing for Secondary Market Execution • Working with a Master Servicer for Best Execution

  3. Traditional Mortgage Revenue Bond Model is Broken Traditional Relationship Inverted Relationship 30yr Traditional MRB (Non-AMT) % 30yr Traditional MRB (AMT) GNMA MBS NIBP Bond Date of Lehman Bankruptcy

  4. MBS Secondary Market is Highly Liquid U.S Fixed Income Securities

  5. MBS Secondary Market Sale Economics • Liquidity and transparency of MBS market allows for daily rate setting • MBS sale example – Assumes government loan with 3.75% mortgage, no points and 3.0% down payment assistance • As of April 2, 2013 • Purchase price of mortgage loan, down payment assistance, origination fees and service release premiums, if appropriate • Present value of 0.19% servicing cash flows at 250% PSA and 5% discount rate

  6. Origination Period Creates Interest Rate Risk GNMA PRICE Market Risk • DAY 90: • MBS IS DELIVERED • DAY 1: • RATE IS • LOCKED • DAY 45: LOAN CLOSES • DAY 60: • LOAN IS • PURCHASED • DAY 75: • LOAN IS • POOLED ORIGINATION WAREHOUSE

  7. Selling TBA Forward Hedges Market Risk GNMA PRICE HFA sells TBA and locks in price Market Risk Eliminated • DAY 90: • MBS IS DELIVERED • DAY 1: • RATE IS • LOCKED • DAY 45: LOAN CLOSES • DAY 60: • LOAN IS • PURCHASED • DAY 75: • LOAN IS • POOLED ORIGINATION WAREHOUSE

  8. TBA Allows HFA to Sell MBS Forward • What is TBA? • TBA is an agreement to deliver an Agency MBS on an agreed upon future date for an agreed upon price • Why is it called TBA? • In a TBA trade, only price, settlement date, type, amount and interest rate are specified; all other characteristics are “To Be Announced” • How does TBA trade? • Most major broker/dealer firms have a mortgage desk that will bid on standard TBA • Most trades are done on a competitive basis

  9. Adjusting Servicing for Secondary Market Sales • MBSs trade best when the pass-through rate is a multiple of 0.50% • Flexible servicing fees allows for the creation of MBS on the half coupon, even if mortgage rates are not • Sample servicing fees for various government loan rates 0.315% Servicing 3.875% FHA Mortgage 3.500% GNMA 0.060% Guarantee Fee

  10. Servicing Fee Affects Overall MBS Value • *Servicing Value calculated at • 250% PSA and 5% discount rate

  11. Composition of MBS Affects Value and Financing Options • TBA eligibility • Mortgage Revenue Bond eligibility • Investors “pay up” for certain MBS characteristics, including: • Maximum loan balance • CRA credit • LTV • FICO • Issuance date • Example of pay-ups for low loan balance pools:

  12. Sample Monthly Cycle for Creating Pools for TBA • Sample April calendar: • April 3: Cut off for loan purchases • April 4: Pool optimization determined • April 10: Notification of delivery published • April 15: HFA purchases MBSs • April 16: HFA notifies TBA counterparty of delivery • April 18: TBA trade is settled

  13. AnselCaine • CaineMitter & Associates Incorporated • (212) 686 - 8820 • acaine@cainemitter.com • 279 Fifth Avenue Fourth Floor • New York, NY 10016