Mortgage – HousingWire

Ginnie Mae EBO loan market buffeted by rising rates
Fannie Mae finalizes two additional credit insurance risk transfers
Profit margins are plunging for nonbanks
Maxwell adds Amy Brandt to board of directors

Ginnie Mae EBO loan market buffeted by rising rates

Posted: 22 Mar 2022 01:05 PM PDT

2022 Mortgage rates — Mortgage rates, rates

New York-based Mortgage Industry Advisory Corp. (MIAC) is in the market with two whole-loan offerings of nonperforming Ginnie Mae-insured mortgages that combined are valued at more than $1.2 billion.

The two deals involve nonperforming loans that are eligible for early buyouts (EBOs) from Ginnie Mae loan pools. The largest of the two EBO whole-loan offerings is valued at $1.1 billion. The second is a much smaller deal valued at $126.8 million.

The seller is not identified for either deal. For all of 2021, MIAC oversaw five EBO whole loan sales valued in total at $690.4 million, according to its website deal listings.

"The mindset is that … there's not much else out there to buy right now," said Brendan Teeley, senior vice president of whole loan sales and trading for MIAC's Capital Markets Group. "And given it’s Ginnie Mae, there's a great deal of confidence that you will get paid [because the underlying loans are insured], so on a risk-weighted basis, it's a great asset."

Ginnie Mae makes it possible for lenders to originate qualifying mortgages that they can then securitize through the government-sponsored agency. Ginnie, however, guarantees only the principal and interest payments to purchasers of its bonds, which are sold worldwide.

The underlying loans carry guarantees, or a mortgage insurance certification, from the housing agencies approving the loans — which include single-family mortgages backed by the Federal Housing Administration, the Department of Veterans Affairs and the U.S. Department of Agriculture.

Teeley added that the two loan-sale deals in the pipeline in March at MIAC may be among the last to benefit from what has been a relatively good pricing market for EBO-eligible whole loan sales.

"Historically, these [EBO nonperforming whole loan deals] have priced around mid-80s price, and there's certainly been an uptick to the 90s [as a percentage of par] in the last year," Teeley explained. "In the last six or eight months, [however,] pricing has centered around par — meaning 100% of the estimated principal balance plus MSR advances."

But that's changing now, as the effect of sharp interest-rate jumps takes some air out of the EBO balloon.

"… We think we're at the end of the trade at these [pricing] levels," Teeley added. "Pricing [on EBO loans] has already crept down to the high 90s [as a percent of par].

"… It’s really opportunistic for sellers [now] to be able to get out with a minimal haircut and get away from the [servicing] advances, and get away from the liability and servicing."

Under Ginnie's EBO program, a nonperforming mortgage can be acquired at par by a lender once it's 90 days past due. If the lender can get it to reperform, typically via a modification to the terms, and it stays current for six consecutive months, the loan is eligible to be re-securitized as part of a new Ginnie Mae loan pool.

"The benefit of this [EBO early buyout program] is that a [lender after purchasing the loan] immediately stops advancing the principal and interest each month," explained Tom Piercy, managing director of Denver-based Incenter Mortgage Advisors.

Piercy added that an EBO-eligible nonperforming loan that is eventually reissued into a new Ginnie security can potentially return a comfortable profit. In the current fast rising-rate environment, however, where mortgage rates are up by at least a point since November of last year, the pricing dynamics in the EBO market have changed, according to Teeley.

He stressed that each deal is unique, however, and pricing can vary depending on the circumstances and the parties involved. Still, the larger interest-rate dynamics now in play are creating price pressures in the market.

"If you’re a buyer, your thought train is I can resolve this asset [a nonperforming EBO-eligible loan] better than they can [the seller], and I can do it more efficiently," Teeley said. "But with the rising rates, there’s not much you can do in the way of a modification [on the lower-rate loans now in the pipeline] that you can deliver at a premium that also benefits the borrower.

"The economics just aren’t there [in some cases]. If something’s worth 95 cents [on the dollar] … then you [as a buyer] can’t pay par and have it work out."

From the loan seller's point of view, however, according to Teeley, "They may decide it's worth selling [the loan] for a 5-point discount [95% of par] versus keeping the asset on the books languishing for a couple years."

There also is another benefit to weeding nonperforming EBO-eligible loans from the books, Teeley said, even if it means selling those mortgages at a slight discount.

“A lot of these EBO [whole loan] sales are done in preparation for an MSR [mortgage servicing rights] sale, to clear up the books,” Teeley said. “If you can get rid of your most delinquent and less-desirable loans, then your MSR pool is better quality. …I know we have had past Ginnie Mae loan sales that were predicated by a need to clean up the MSR books for MSR sales.”

A rising-rate environment also tends to increase the value of MSRs, which represent a small slice of the interest rate on a mortgage. As rates rise, mortgage-prepayment speeds via refinancing decrease, which expands the timeframe for MSR cash flows.

So, the MSR market is hot right now. For example, Piercy said his firm completed a dozen t ransactions in January involving agency MSR loan pools with a combined value of $113.2 billion, which is close to what Incenter historically has sold in an entire year. As of late February, Incenter had put out to bid at least two additional MSR deals with a combined value of $24 billion, Piercy added, and had another $40 billion worth of MSR deals in the pipeline.

"We have not seen rates this high since May 2019," Piercy said. "As such, we begin to see prepayment curves adjust…. This impacts origination volume negatively but provides for substantial pickup in value of the MSR asset across all vintages."

MIAC, for its part, so far in March is marketing two MSR offerings worth a combined $2.24 billion, on the heels of a $6.23 billion MSR offering in late January and yet another in January worth $221.5 million.

"We had the $1.94 billion bid last week, and we were able to secure an executed LOI [letter of intent], and we will have the $300 million [MSR offering] bidding [soon]," said Michael Carnes, managing director of the MSR valuations group at MIAC, referring to the two MSR deals his firm has on the table so far this month.

"Plus, we plan to release another two offerings [as soon as] this week," Carnes added. "And we have others waiting in the wings as both the number of trades we're seeing, and the trading levels, have been very impressive to say the least."

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Fannie Mae finalizes two additional credit insurance risk transfers

Posted: 22 Mar 2022 12:20 PM PDT

On the heels of completing its first credit insurance risk transfer (CIRT) deal of the year in early March, Fannie Mae has announced that it has executed two additional CIRT deals.

The newest deals, CIRT 2022-2 and CIRT 2022-3, together transferred $1.8 billion of mortgage credit risk to private insurers and reinsurers.

"We appreciate our continued partnership with the 25 insurers and reinsurers that have committed to write coverage for these two deals," said Rob Schaefer, Fannie Mae's vice president for capital markets.

The initial deal of 2022, CIRT 2022-1, also transferred millions of dollars of credit risk to a group of private insurers and reinsurers. That credit risk is tied to a $26.1 billion reference pool of single-family mortgages.

As part of that initial deal, Fannie Mae will retain risk for the first 25 basis points of any loss on the $26.1 billion reference loan pool. If that $65.3 million retention layer is tapped, then the 22 insurers and reinsurers will cover the next 295 basis point of loss on the pool, up to $770.7 million.

CIRT offerings 2 and 3 work similarly. The covered loan pool for CIRT 2022-2 consists of some 87,400 single-family mortgage loans with an outstanding unpaid principal balance of $26.5 billion. The covered loan pool for CIRT 2022-3 involves 76,600 single-family mortgage loans with an outstanding unpaid principal balance of $23.3 billion.

With CIRT 2022-2, Fannie Mae will retain risk for the first 25 basis points of loss on the $26.5 billion covered loan pool, representing a $66.3 million retention layer. If that layer is exhausted, then the 22 insurers and reinsurers that are part of the CIRT deal will cover the next 335 basis points of loss on the pool — up to a maximum coverage of about $889 million.

With CIRT 2022-3, Fannie Mae will retain risk for the first 65 basis points of loss on the $23.3 billion covered loan pool. If that $151.6 million retention layer is used up, then the 23 insurers and reinsurers that are part of the deal will cover the next 385 basis points of loss — up to a maximum coverage of some $898 million.

The coverage terms for the latest CIRT deals, like the initial deal of 2022, are based on actual losses for a term of 12.5 years. Fannie Mae can cancel the coverage on each deal after five years by paying a cancellation fee.

"Since inception to date, Fannie Mae has acquired approximately $17.6 billion of insurance coverage on $612 billion of single-family loans through the CIRT program," Fannie Mae said in a statement announcing the new CIRT transactions.

In addition, Fannie Mae also is transferring mortgage credit risk to the private market through its separate Connecticut Avenue Securities (CAS) real estate mortgage investment conduit, or REMIC, program. It's most recent credit-risk transfer (CRT) transaction via the CAS program — and third of the year — was a $1.24 billion note offering backed by a reference loan pool of 150,395 primarily single-family mortgages valued at $44.4 billion.

With the completion of that third CRT transaction unveiled in March, called CAS Series 2022-R03, Fannie Mae will have brought a total of 47 CAS deals to market and issued over $53 billion in notes since its initial offering in 2013. Through the CAS program, the agency has transferred a portion of the credit risk to private investors on some $1.7 trillion in single-family mortgage loans, as measured at the time of the transaction.

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Profit margins are plunging for nonbanks

Posted: 22 Mar 2022 08:39 AM PDT

Nonbanks and mortgage subsidiaries of chartered banks reported grim profitability figures in the fourth quarter of 2021, when costs reached a new high and margins fell to the lowest level since early 2019. And most industry observers think it will only get worse in the next few quarters.

Net gains in Q4 declined to $1,099 on each loan originated, compared to $2,594 in the previous quarter, according to a report published by the Mortgage Bankers Association (MBA) on Thursday.

The data, compiled from 359 nonbank lenders, shows that the average pre-tax production profit was just 38 basis points in the fourth quarter, down from an average net production profit of 89 bps in the third quarter and a decrease from 137 bps on a year-over-year basis. (The average quarterly pre-tax production profit, from the third quarter of 2008 to the most recent quarter, is 56 basis points.)

Additionally, the average production volume came in at $1.13 billion per company, a small decline from $1.17 billion in Q3. Volume count per company averaged 3,711 loans, a drop from the 3,889 loans made the previous quarter, the MBA said.

Marina Walsh, vice president of industry analysis at the MBA, said in a statement that net production profits for nonbanks reached their three-year low following a strong run of profitability.

"Among the headwinds, were lower revenues and higher production costs," she said.

She added: "With revenue tightening and volume slowing, it is becoming increasingly important for companies to adjust costs as the lending landscape moves from a rate-term refinancing market to a purchase and cash-out refinancing market."

The fourth quarter saw total mortgage production revenue dip to 353 bps, down from 396 bps in the first quarter, the MBA said. On a per-loan basis, production revenue also took a hit, declining to $10,569 in the fourth quarter compared to $11,734 in the third quarter of 2021.

Meanwhile, per-loan production expenses have continued climbing and now hover at $9,470 per loan, compared to $9,140 in the prior quarter. Personnel expenses also rose, climbing to an average of $6,438 per loan, up from $6,185 per loan in Q3, further eating into mortgage profits.

Servicing net financial income went from $37 per loan in the third quarter to $71 per loan in the fourth quarter. Servicing operations benefited from slower prepayments and low delinquencies that helped boost mortgage servicing rights (MSR) valuations.

The report shows that, 76% of the firms posted a pre-tax net financial profit in the fourth quarter – but it would be 58% if considered only the production operation.

As a further indicator that the market is shifting from refis to purchase, the reported purchase share of total originations was at 60% in the fourth quarter. The trade group estimates that the cumulative purchase share for the mortgage industry was 47%.

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Maxwell adds Amy Brandt to board of directors

Posted: 22 Mar 2022 07:42 AM PDT

Digital mortgage platform Maxwell has brought on Amy Brandt to its board of directors to gain perspective on the challenges that lenders face and the gaps in the mortgage digitalization process.

A veteran with two decades of experience in digital mortgage solutions, Brandt most recently served as president and CEO at First American Docutech. She is operating executive director at the private equity firm Serent Capital. The executive also serves as chairman of the board of SunToWater Technologies LLC and as a board member at InhabitIQ.

Talks with Maxwell evolved over the last 60 days, and Brandt was invited to be an independent member of the board. “Knowing originators very well from my previous seat, I can bring a good perspective of the impact we’re going to have and make sure that we’re on target,” Brandt told HousingWire.

Founded in 2015, Maxwell uses artificial intelligence to accelerate the mortgage process for over 300 community lenders, banks, and credit unions. The company, backed by JPMorgan Chase, says it has facilitated over $150 billion in loan volume and helped lenders close over 15% more loans per month.

Brandt said that the mortgage business is structurally fragmented, with different parts of the process and various providers. In the point-of-sale tool, there are solutions for title, appraisal, processor, and underwriter, all interfacing in different ways.

“I picked Maxwell because they are trying to solve the technology gap and the digitization problems in the mortgage, and they’ve already gotten traction and success in reducing the time cycle and lowering costs.”

Maxwell was selected as a 2022 HousingWire Tech100 mortgage honoree.

As a board member, Brandt said that she will focus on making sure that Maxwell will execute and deliver its roadmap. She will also help the company to bring new partners to fill all gaps in the process and augment lenders’ capabilities to make it cheaper and faster.

Brandt will hold the position in a moment when regulators pressure lenders to collect accurate data to promote fair lending. “Regulators want to make sure that lenders are capturing accurate data, and then they can use the data to run tests to make sure that the lending practices are fair,” she said.

In addition, government-sponsored enterprises (GSEs) are interested in digitization to improve costs and borrowers’ experiences. “Hopefully, digitalization will improve the practices and the performance of the loans.”

Brandt said that lenders often claim they are too busy or can’t afford the implementation of digital solutions. But it is essential in a purchase environment when they have less volume that is more expensive to produce, she argued.

“That’s a dangerous place to be if you are an originator. You will have to find a way to be scalable and lower your costs. And that’s only really going to be possible with technology.”

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Tuesday, March 22, 2022