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The Changing Landscape of Mortgage Servicing Moderator: Sheryl Krocek , U.S. Bank Panelists: Scott Schmitt, U.S. Bank Ansel Caine, Caine Mitter Friday, April 5th 2013. The New MLS Landscape. How did we get here? National HFA-MRB Servicers 2006 2011 Today / 2013.
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The Changing Landscape of Mortgage Servicing Moderator:Sheryl Krocek, U.S. Bank Panelists:Scott Schmitt, U.S. Bank Ansel Caine, Caine Mitter Friday, April 5th 2013
The New MLS Landscape How did we get here? National HFA-MRB Servicers 2006 2011 Today / 2013
The New MLS Landscape How did we get here? Scary:Declining Servicing Values Scarier:Increasing Foreclosue and Repurchase Volume Scariest:QM, QRM, Dodd-Frank and Basel III
The Decision Makers! OCC Regulations! HUD Regulations! GSE Guidelines and Repurchase Requests!
Regulations • MDIA > Confirm early TIL disclosed to borrower 3 days from application, verify APR not increased greater than .125 • RESPA > Confirm Initial and Final GFE • High Priced – FFIEC Verify lock date, apr, and term which calculates rate spread of loan. • High Cost > Run multiple tests to ensure borrower fees not excessive • Regulations / Form Changes Programs Changes Credit Score / DTI Changes TBA Programs
sk The fun never stops! Re-Purchase& MI Rescissions Requirements of Dodd-Frank & Basil III Changing Value of Servicing
Changing Servicing Values Cost of Servicing Loss Mitigation, Basel III, Dodd-Frank, etc… Fixed vs. Market Adjusted Ability to Adapt to Market
THE CHANGING LANDSCAPE FOR MORTGAGE SERVICING SERVICING ADJUSTMENTS NEEDED FOR BEST EXECUTION AND TBA Ansel Caine Friday, April 5, 2013
Topics • MBS Secondary Market / TBA Overview • Adjusting Servicing for Secondary Market Execution • Working with a Master Servicer for Best Execution
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
MBS Secondary Market is Highly Liquid U.S Fixed Income Securities
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
Origination Period Creates Interest Rate Risk GNMA PRICE Market Risk DAY 1: RATE IS LOCKED DAY 45: LOAN CLOSES DAY 60: LOAN IS PURCHASED DAY 75: LOAN IS POOLED DAY 90: MBS IS DELIVERED ORIGINATION WAREHOUSE
Selling TBA Forward Hedges Market Risk GNMA PRICE HFA sells TBA and locks in price Market Risk Eliminated DAY 1: RATE IS LOCKED DAY 45: LOAN CLOSES DAY 60: LOAN IS PURCHASED DAY 75: LOAN IS POOLED DAY 90: MBS IS DELIVERED ORIGINATION WAREHOUSE
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
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
Servicing Fee Affects Overall MBS Value *Servicing Value calculated at 250% PSA and 5% discount rate
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:
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
Ansel Caine Caine Mitter & Associates Incorporated (212) 686 - 8820 acaine@cainemitter.com 279 Fifth Avenue Fourth Floor New York, NY 10016
TBA Issues for Servicers • Multiple Pricing Options • Frequent Price Adjustments • Delivery timelines • Loan Lock Extensions
Challenges Current & Future