IFR Magazine – June 08, 2019

STRUCTURED FINANCE

5-"3 ûTHISûWEEK ûCOMBININGûTHEûSTAPLEû
mortgage bond programmes of FANNIE MAE
and FREDDIE MAC in one of the biggest changes
TOûTHEû53TRNûMARKETûINûTHEûPASTûDECADE
4HEûNEWû5-"3ûHASûBEENûINûTHEûWORKSûFORû
SEVENûYEARSûTOûlXûAûDISPARITYûINûTHEûWAYû
&ANNIEûANDû&REDDIEûBONDSûTRADE ûANDûTOû
improve the overall liquidity of the agency
mortgage bond market.
&ANNIEû-AEûHASûHISTORICALLYûISSUEDûMOREû
AGENCYû-"3ûTHANû&REDDIEû-AC ûANDûASûAû
result its bonds were more liquid.
&REDDIEûBONDSûTRADEDûATûAûSLIGHTûDISCOUNTû
because of this.
&REDDIEû-ACûSUBSIDISEDûPARTûOFûTHEûFEEûITû
charged loan originators to encourage them
to securitise their mortgages with them, a
cost that was essentially born by the
taxpayer while the agencies are under
public conservatorship.
h4HEûTRADINGûDIFFERENCESûINû&REDDIEû-ACû
ANDû&ANNIEû-AESûSECURITIESûMEANTûTHEû
market wasn’t as liquid or competitive as it
COULDûHAVEûBEEN vûWROTEû-ARKû(ANSON û
senior vice-president, securitisation at
&REDDIEû-AC ûONû7EDNESDAY
#OMBININGûTHEûTWOûSEPARATEû-"3ûPOOLSû
into a single-security removes the need for
this taxpayer burden and could increase
overall liquidity in the market, which might
result in lower premiums on the bonds and
lead to cheaper mortgages for borrowers.
h7EREûEXCITEDûABOUTûIT vûSAIDû4OMû
-ANDEL ûCO
FOUNDERûûCHIEFûINVESTMENTû
OFlCERûOFûSTRUCTUREDûlNANCEûINVESTMENTû
lRMû3EMPERû#APITALû-ANAGEMENT
“The agency mortgage market is already
LIQUID ûBUTûIFûTHEû53TRNûOFû&ANNIEûANDû
&REDDIEûPAPERûTRADESûASûAûSINGLEûSECURITYûTHATû
will hopefully lead to a modest
improvement in liquidity.”
But it remains to be seen how the single-
security will perform, with the agencies
remaining operationally separate and
competing with each other in the mortgage
market.
“The big issue will be maintaining the
SIMILARITYûBETWEENûTHEû&REDDIEû-ACûANDû
&ANNIEû-AEûPRODUCTIONûPOOLSûUNDERûTHEû
5-"3ûPRE
PAYMENTûALIGNMENTûGUIDELINES vû
SAIDû3COTTû"UCHTA ûHEADûOFûlXED
INCOMEû
strategy at Brean Capital.
Bond traders apply steeper discounts to
bonds with higher pre-payment speeds, as
they result in lower yields.
4HEû&(&!ûHASûIMPLEMENTEDûGUIDELINESûFORû
the agencies to help ensure pre-payment
speeds at both agencies are aligned, to
prevent any disparity in performance of the
5-"3ûSOLDûBYûEACHûENTITY
But the expected wave of mortgage
RElNANCINGûACTIVITYûAHEADûCOULDûTESTûTHOSEû
efforts.
30-year mortgage rates hit a two-year low
OFûûTHISûWEEK ûACCORDINGûTOû&REDDIEû-AC

Low rates usually draw borrowers to

RElNANCEûTHEIRûMORTGAGEûWHICHûDRIVESû

faster pre-payment speeds.

Around US$2trn of outstanding

conventional mortgages are now eligible to

BEûRElNANCEDûACCORDINGûTOû&REDDIEû-ACû

ûTHEû

majority of what was originated in 2018.

“This [rates] rally, and peak [pre-payment]

SPEEDSûFROMûTHEû-ARCHûRALLYûWHICHûAREû

expected to show up in the June report later

this week, will make the timing of this roll-

out very interesting,” said Buchta.

“All we can do at this point is wait and

WATCHvûSAIDû-ANDEL

h7EûWILLûWATCHûTOûSEEûHOWûMUCHûANDûHOWû

WELLûTHEû4"!ûMARKETûFORû5-"3ûBENElTSûTHEû

nation’s homebuyers,” said Hanson. “That’s

a key part of our mission, and we are

absolutely committed to it.”

DEBUT ISSUERS JOIN EXPANDING

NON-QM RMBS MARKET

Investment manager ANGELO GORDON priced a

DEBUTû53û2-"3ûDEALûBACKEDûBYûNON

qualifying residential mortgages last

Tuesday, joining the ranks of new issuers in

the expanding asset class.

4HEûlRMûISûTHEûLATESTûNEWûISSUERûINûANû

asset class that is expected to more than

double in terms of annual issuance this year.

Sole bookrunner Credit Suisse led the

US$365.13m deal, called GCAT 2019-NQM1.

)TûFOLLOWEDûAûDEBUTû53MûNON

1-û

deal from CARRINGTON MORTGAGE SERVICES,

labelled SPRUCE HILL MORTGAGE LOAN TRUST 2019-

SH1, which was structured by Nomura and

priced last week.

“New players are becoming a theme in

THEûNON

1-  ûMARKETûANDûWEREûEMBRACINGû

ITvûSAIDû$AVEû'OODSONûHEADûOFûSECURITISEDû

lXEDûINCOMEûATû6OYAû)NVESTMENTû

-ANAGEMENT

“The industry was decimated by the credit

crisis. It was necessary to see new market

participants develop a plan to service this

part of our society,” he said.

%80!.$).'û!33%4û#,!33

!NGELOû'ORDONûILLUSTRATEDûTHEûEXPANDINGû

range of the collateral being securitised in

NON

1-û2-"3ûWHICHûCOVERSûAûBROADûRANGEû

of mortgages that fall outside the criteria for

AGENCYûlNANCING

!BOUTûûOFûTHEûCOLLATERALûINû!NGELOû

'ORDONSûDEBUTûDEALûCONSISTSûOFûLOANSû

ORIGINATEDûBYû#OMMUNITYû$EVELOPMENTû

&INANCIALû)NSTITUTIONSû#$&)    

4HEû#$&)ûPROGRAMMEûWASûSETûUPûINûû

to encourage mortgage lending to low-

INCOMEûANDûlRST

TIMEûHOMEOWNERS

They are exempt from the Consumer

&INANCIALû0ROTECTIONû"UREAUSûABILITY

TO

repay rules, which require creditors to make

a good faith determination of a borrower’s

ability to repay a mortgage.

This makes the loans potentially riskier.

They are also exempt from risk retention

rules, meaning issuers hold less skin-in-the-

game in deals that include these loans.

"UTûMARKETûSOURCESûSAYûTHATûTHEûNON

1-û

2-"3ûMARKETûWHICHûISûSTILLûRELATIVELYûSMALLû

has scope to expand responsibly.

!CCORDINGûTOû"ANKûOFû!MERICAû-ERRILLû

Lynch analysts, US$9.6bn has been sold so

far this year, already close to the US$10bn

sold in 2018, and they expect more than

US$20bn of issuance in 2019.

“The market is still growing and we

welcome competition as it helps spread

AWARENESSvûSAIDû4OMû(UTCHENSû%60ûOFû

PRODUCTIONûATû!NGELû/AKû-ORTGAGEû3OLUTIONS

h7EûTHINKûTHISûCOULDûBEûAû53BNû

MARKETûANDûATûTHATûSIZEûWOULDûSTILLûHAVEû

reasonable guidelines and good loans, and

we’re at around US$20bn now, so we still

have room to grow.”

MORE STABLE MARKET

"OTHû!NGELOû'ORDONûANDû#ARRINGTONSûDEALSû

were priced slightly wide of where a more

regular issuer, ANGEL OAK, priced its third deal

of the year in the prior week.

The senior tranches of the Angel Oak deal were

sold at 80bp over swaps, compared with 95bp for

THEûEQUIVALENTûTRANCHEûINû!NGELOû'ORDONûANDû

100bp in the Carrington transaction.

h4HEûECONOMICSûOFû2-"3ûAREûSTILLûPOSITIVEû

for issuers, despite the market widening

from the tights in the middle of last year,”

said Lauren Hedvat, director of capital

markets at Angel Oak.

h3INCEûTHEûBEGINNINGûOFûTHEûYEARûTHEû2-"3û

market has been relatively more stable and

seen some spread tightening following the

volatility in the fourth quarter of 2018.”

And a low rate environment is also cause

for optimism on the credit risk and

PERFORMANCEûOFûNON

AGENCYû2-"3û

ACCORDINGûTOû'OODSON

“Lower rates means faster pre-payment

speeds, so the bonds look shorter. Shorter

DURATIONûPROlLESûAREûASSOCIATEDûWITHûBEINGû

less risky, so there should be lower

volatility, and more potential for rating

upgrades,” he said.

US ABS

RATE MOVES WEIGH ON ABS

PRIMARY MARKET

&UNDINGûCONDITIONSûTOUGHENEDûSLIGHTLYûFORû

some borrowers in the ABS market this

week as a volatile rates market kept some

investors on the sidelines.

Senior ABS tranches have been under

pressure in the secondary from weaker

technicals and falling Treasury rates, and this

leaked into the primary market last week.