Post on 22-Apr-2018
Mortgage Strategies in the Current Economic Environment
Katie HopkinsSVP, Investment Strategieskhopkins@viningsparks.com
Mortgage Market Trends
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Limited Mortgage Opportunities
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• “Fed” products, 15yr and 30yr current coupons, relatively tight
• Off the run terms, 10yr and 20yr, sometimes cheaper• Relative value in non‐TBA collateral including jumbo, high LTV, and relo
• Low price (near par) products that shorten• High price (premium market price) products with moderate extension potential
Still worthwhile because…
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• Other sectors also tight• Spreads with limited credit risk• Myriad terms and structures• Market dynamics support spreads• Liquidity• Current cash flows• Pockets of value remain
Cashflow Comparison: All‐or‐Nothing vs. Monthly
5Yr NC 3Mo 15yr 3% MBS
Prepayments
• Mortgage holders can prepay their loans– Refinance– Move– Default
• Additional principal passed through to bond holders• Prepayments are one of the most important factors when determining your return
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1. GROCERY SHOPPING2. SPEND TIME WITH
FAMILY/FRIENDS3. WATCH STORAGE WARS
…
99. TAKE SPARE CHANGE TO COINSTAR100. CALCULATE THE PRESENT VALUE OF MY
FUTURE CASHFLOWS USING SEVERAL DIFFERENT REFINANCING SCENARIOS
What Impacts Mortgage Prepayment Speeds?
• Mortgage Rates• Weighted average coupon (WAC)• Product Type• Loan size• Loan age (WALA)• Occupancy• Servicer• Loan‐to‐value• FICO Score/Borrower Debt‐to‐Income• Policy
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Rates Impact Refis/Prepays; Inverse Relationship
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Refi Index and Rates
Refi Index30yr Mtg Rate15yr Mtg Rate
1889
What Impacts Mortgage Prepayment Speeds?
• Mortgage Rates• Weighted average coupon (WAC)• Product Type• Loan size• Loan age (WALA)• Occupancy• Servicer• Loan‐to‐value• FICO Score/Borrower Debt‐to‐Income• Policy
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Prepayment Speeds Vary by Coupon…
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…but historical relationships have been affected by the credit crisis 0
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Historical Prepayment Speeds FNCI 3.5 AllFNCI 3 AllFNCI 2.5 All
What Impacts Mortgage Prepayment Speeds?
• Mortgage Rates• Weighted average coupon (WAC)• Product Type• Loan size• Loan age (WALA)• Occupancy• Servicer• Loan‐to‐value• FICO Score/Borrower Debt‐to‐Income• Policy
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Prepayment Speeds by Product Type
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Historical Prepayment Speeds FNCI 3.5 AllFNCT 3.5 AllFNCL 3.5 All
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Identify Collateral Concentrations
What Impacts Mortgage Prepayment Speeds?
• Mortgage Rates• Weighted average coupon (WAC)• Product Type• Loan size• Loan age (WALA)• Occupancy• Servicer• Loan‐to‐value• FICO Score/Borrower Debt‐to‐Income• Policy
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Batman and Robin’s “To‐Do” List
Batman and Robin’s “To‐Do” List
Batman and Robin’s “To‐Do” List
Batman vs. Robin: Refi Incentive?
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$500,000 $54,245 $151 2 years
$100,000 $10,849 $30 9 years
Loan Amount Total Interest Savings
Monthly Savings Time
Pow!
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Cohort Comparison Tab
• Maps each pool or CMO to a collateral type (ex: FNCI 3% 2011) and compares to collateral averages
What Impacts Mortgage Prepayment Speeds?
• Mortgage Rates• Weighted average coupon (WAC)• Product Type• Loan size• Loan age (WALA)• Occupancy• Servicer• Loan‐to‐value• FICO Score/Borrower Debt‐to‐Income• Policy
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Prepayment Speeds by Vintage
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Historical Prepayment Speeds FNCI 3.5 2010FNCI 3.5 2011FNCI 3.5 2012
What Impacts Mortgage Prepayment Speeds?
• Mortgage Rates• Weighted average coupon (WAC)• Product Type• Loan size• Loan age (WALA)• Occupancy• Servicer• Loan‐to‐value• FICO Score/Borrower Debt‐to‐Income• Policy
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What Impacts Mortgage Prepayment Speeds?
• Mortgage Rates• Weighted average coupon (WAC)• Product Type• Loan size• Loan age (WALA)• Occupancy• Servicer• Loan‐to‐value• FICO Score/Borrower Debt‐to‐Income• Policy
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Servicer Example: Mortgage Investors Corp
Solution: Diversify, diversify and…DIVERSIFYpage 27
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Descriptive Information
Displays:• Loan Count• WALA and Vintage• Third Party Origination (TPO)• Top 2 Geos• Purpose: Purchase vs. Refi• Top Servicer and Percentage
What Impacts Mortgage Prepayment Speeds?
• Mortgage Rates• Product Type• Loan size• Loan age (WALA)• Weighted average coupon (WAC)• Occupancy• Servicer• Loan‐to‐value• FICO Score/Borrower Debt‐to‐Income• Policy
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15yr Market Overview
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30yr Market Overview
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HARP 2.0 Impact
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Since it’s inception in December of 2011, speeds on eligible pools have increased 16‐22 CPR
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Monitor Prepay/Extension Risk
• PREPAYMENT REPORT• High premium prices• Possibility of faster/slower speeds • Unacceptable yields• Price exposure• Need for diversification of risk
For many customers, prepayments represent the greatest risk to current portfolio holdings and one of the most important likely determinant of returns.
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Performance Monitoring• Trends
– Recent speeds– Policy change and news impacts– Burnout potential
• Yields– Current and expected
• Using recent historical speeds• At adjusted speeds• At scenario speeds
– Book and market
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Prepay Scenarios Yield Tab
• This w
• Book Gain/Loss Calculations• Average Life and Yield Calculations
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Portfolio Action Motivations• Low (or sometimes negative) book yields• Low market yields
– Economic decision driver– Time sensitive opportunities– TBA eligibility creates inefficiencies
• Over‐allocation to specific types of risk• Book gains and losses
Relative Value: The Fed’s LeftoversMeatloaf AGAIN?• Hybrid ARMs• 20yr MBS• Off‐the‐Run Collateral
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Relative Value: Hybrid ARMs
• Relative value vs. fixed – not on Fed’s target list• Relatively tame prepayments• 7/1 and 10/1 hybrids alternatives 15yr “current” coupons (2.5%s and 3.0%s)
• 3/1 GNMA hybrids alternatives for shorter GNMA CMOs
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20yr Collateral
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Relative Value: Off‐the‐Run Collateral
• High LTV, Relo, Jumbo• Benefit: slightly DISLOCATED from rate‐related behavior
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Relocation Loans may Prepay Without Rate Incentive
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Historical Prepayment Speeds
FNRE 4 2010
FNCL 4 2010
FGLMC Buyout Speeds Minimal
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GNMA Collateral: Higher Buyout Speeds
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CMO Advantages
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• Coupon variety available• Structuring possibilities
– Reduce prepayment risk– Limit extension risk– Tailor cash flows
• Collateral diversity– Higher loan counts– Broader spectrum of servicers, geography, etc
• Less payup for some loan traits
Jumbos/30yr/High LTV
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Historical Prepayment Speeds FNJMCK 3.5 2012FNCL 3.5 2012FNHLCQ 3.5 2012
Three Options: TBA vs. High LTV vs. Jumbo
• TBA @ 106‐16 = small bid/ask spread, more liquid• High LTV @ 107‐17 = slower and more stable speeds• Lower price jumbo @ 104‐14 = less price risk (spread
compression) and less premium, fast speeds
There are multiple ways to manage mortgage premium and mitigate risk. Diversification may be the most important.
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Conclusion
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• Prepays most important factor in yield performance• Put yourself into the shoes of the borrower when thinking about prepayment sensitivity
• Diversify collateral types and coupons• Prepayment Report can help to reveal risks• CMOs can help gain exposure to other collateral types
• Relative value in ARMs, 20yr collateral, Fed Leftovers
Notes
INTENDED FOR INSTITUTIONAL INVESTORS ONLY. The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. Interest rate swaps and derivatives are offered and sold via Vining Sparks Interest Rate Products, LLC (VSIRP). VSIRP is an independent operating entity and is not a subsidiary of Vining Sparks IBG, LP. VSIRP is not a broker/dealer registered with the SEC. The firm may have positions, long or short, in any or all securities mentioned. Vining Sparks is a member FINRA/SIPC.