Mortgage Strategies in the Current Economic Environment · Mortgage Strategies in the Current...

Mortgage Strategies in the Current Economic Environment

Katie HopkinsSVP, Investment [email protected]

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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2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

1000

2000

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4000

5000

6000

7000

8000

9000

10000

Mortgage Ra

tes

Refi Inde

x

Refi Index and Rates

Refi Index30yr Mtg Rate15yr Mtg Rate

1889



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Prepayment Speeds Vary by Coupon…

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…but historical relationships have been affected by the credit crisis 0

5

10

15

20

25

30

Jul‐12 Aug‐12 Sep‐12 Oct‐12 Nov‐12 Dec‐12 Jan‐13 Feb‐13 Mar‐13 Apr‐13 May‐13 Jun‐13 Jul‐13 Aug‐13

CPR

Historical Prepayment Speeds FNCI 3.5 AllFNCI 3 AllFNCI 2.5 All



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Prepayment Speeds by Product Type

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0

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CPR

Historical Prepayment Speeds FNCI 3.5 AllFNCT 3.5 AllFNCL 3.5 All

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Identify Collateral Concentrations



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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



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Prepayment Speeds by Vintage

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CPR

Historical Prepayment Speeds FNCI 3.5 2010FNCI 3.5 2011FNCI 3.5 2012



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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


• 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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0

20

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2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00 ≥6.50

Amt O

utstan

ding

in Billions

Coupon

Conventional 15yr Outstanding Balance

30yr Market Overview

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0

50

100

150

200

250

300

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450

500

3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 ≥7.00

Amt O

utstan

ding

in Billions

Coupon

Conventional 30yr Outstanding Balance

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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CPR

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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0

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CPR

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.

Mortgage Strategies in the Current Economic Environment · Mortgage Strategies in the Current...

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