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Loan Portfolio Solutions Tools for Credit Unions

Loan Portfolio Solutions Tools for Credit Unions. CUNA Webinar April 6, 2010. © 2010 Fannie Mae.

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Loan Portfolio Solutions Tools for Credit Unions

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  1. Loan Portfolio SolutionsTools for Credit Unions CUNA Webinar April 6, 2010 © 2010 Fannie Mae.

  2. The CUNA Lending Council is a national community of 900 credit union lending professionals dedicated to being the primary source of best lending practices and educational opportunities for our industry. cunalendingcouncil.org Advice. Answers. Real-World Solutions.

  3. Credit Union Mortgage Portfolio Growth 11.9% total compound annual growth rate over 10 yrs in mortgages Millions Source: SNL Financial

  4. Bonds and loans are both fixed income investments that require active risk management • >>Most institutions know exactly what their bond portfolios are worth and know exactly how to sell them • >>Mortgage portfolios are generally passively managed from an investment standpoint • >>Few institutions know: • What their mortgage portfolio is worth today • Where or how they could sell parts of their loan portfolio quickly

  5. Credit Union Whole Loan Portfolio Management • Profile & Potential Objectives • >> Hold first lien whole loan mortgages for investment • >> Optimize net worth position • >> Manage appropriate asset-liability profile • >> Ensure adequate liquidity • >> Mitigate credit risk • >> Execute profitable asset sales • >> Comply with regulatory guidance • >> Maintain relationship with customer

  6. Credit Union Whole Loan Portfolio Management • Challenges • >> Uncertain of value of assets on balance sheet • >> Passive management of loan portfolio as an investment; unclear view of interest rate risk and credit risk in portfolio • >> Potential exposure to declining home prices and economic events • >> Unfamiliar with portfolio sales/securitizations process • >> Uncertainty surrounding what is eligible • >> Addressing potential concerns of regulators

  7. Considerations for Mortgage Portfolio Management • Key risks to consider: • >> Interest rate risk • >> Credit risk • How can you use your portfolio to: • >> Improve net worth position • >> Increase liquidity • >> Generate earnings

  8. Considerations for Mortgage Portfolio Management • Key risks to consider: • >>Interest rate risk • >>Credit risk • How can you use your portfolio to: • >> Improve net worth position • >> Increase liquidity • >> Generate earnings

  9. Interest Rate Risk • Fannie Mae Economic Outlook – Interest Rate Forecast as of March 2010 Source: Fannie Mae Monthly Economic Outlook, 3/18/2010 – For latest updates, see www.fanniemae.com / Media / Financial News

  10. Short Repricing Intermediate Repricing Long Repricing Duration Mismatches Will Compress Margins Duration Loans $ Liabilities $

  11. Interest Rate Risk Sample Mortgage Loan Portfolio – Impact of Interest Rate Changes on Price and Duration • Source: Fannie Mae Capital Markets, Interest rate reference benchmarks from Bloomberg as of 3/5/2010 Sample Using Hypothetical Data and Assumptions – FOR DISCUSSION PURPOSES ONLY

  12. All of these players need to shed duration when rates rise Hedge Funds Total Return Managers Insurance Companies Credit Unions These players can manage extension risk on both sides of the A/L equation: by selling mortgages, selling treasuries, or by increasing liability durations through borrowing further out on the yield curve. Depositories generally don’t have the same flexibility. Their liabilities are mostly very short term deposits, thus the need to manage duration via assets. The entire mortgage investing universe faces the same extension risk problem you face: but most of the players have more tools at their disposal to manage interest rate risk.

  13. Considerations for Mortgage Portfolio Management • Key risks to consider: • >> Interest rate risk • >>Credit risk • How can you use your portfolio to: • >> Improve net worth position • >> Increase liquidity • >> Generate earnings

  14. Credit Risk Considerations Housing market overview: • The recession and unemployment continue to suppress the housing market • Housing is stabilizing but is nowhere near healthy • Foreclosures continue to rise • Homeowners are losing equity • There is an excess supply of homes • Home prices will likely decline but at a more moderate pace • Still some reasons to be hopeful about the outlook for the housing market this year Source: Fannie Mae 10-K, Q42009; First American Core Logic as cited in FM 10K, Q4 2009 Commentary current as of March 2010

  15. Home Price Growth/Decline Rates in the U.S. Fannie Mae Home Price Index * S&P/Case-Shiller Index 9.8% 7.7% 10.6% 10.7% 14.6% 14.7% -0.3% -8.5% - 18.3% -2.5% We expect peak-to-trough declines in home prices to be in the 17% to 24% range (comparable to a 32% to 40% range using the S&P/Case-Shiller index method). Source: Fannie Mae 2009 Credit Supplement * Initial estimate based on purchase transactions in Fannie-Freddie acquisition and public deed data available through the end of December 2009, supplemented by preliminary data available for January and February 2010.  Including subsequent data may lead to materially different results. 

  16. United States -16.4% State Home Price Change In excess of -15% -15% to -10% -10% to -5% -5% to 0% Home Price Declines Peak-to-Current (by State) as of 2009 Q4 Mountain -25.6% 8.9% West North Central -5.9% 5.2% East North Central -15.4% 12.6% Pacific -34.4% 23.5% Middle Atlantic -8.0% 12.1% South Atlantic -23.1% 21.0% West South Central -1.0% 6.9% East South Central -3.8% 3.6% • - Top %: State/Region Home Price Decline Rate % from applicable peak in that state through December 31, 2009 • Bottom %: % of Fannie Mae single-family conventional guaranty book • of business by unpaid principal balance as of December 31, 2009 Note: Regional home price decline percentages are a housing stock unit-weighted average of home price decline percentages of states within each region. Initial estimate based on purchase transactions in Fannie-Freddie acquisition and public deed data available through the end of December 2009, supplemented by preliminary data available for January and February 2010.  Including subsequent data may lead to materially different results.

  17. One out of Four Homes with Mortgages Has Negative Equity Share of mortgages with negative equity, 2009Q4 Source: First American CoreLogic

  18. Housing Inventory-To-Sales Ratios Have Improved Source: Local Realtor Associations National

  19. SDQ Loans Could Put Pressure on Housing Prices Sources: LoanPerformance and Realtor.com

  20. Considerations for Mortgage Portfolio Management • Key risks to consider: • >> Interest rate risk • >> Credit risk • How can you use your portfolio to: • >>Improve net worth position • >>Increase liquidity • >>Generate earnings

  21. Loan Portfolio as an Investment • Top 5 Things to Know: • >> Understand exactly what you own: Invest the time to maintain a robust data set on your entire loan portfolio • >> Understand interest rate risk: Know which portions of your portfolio you’ll need to sell in different interest rate scenarios to maintain desired asset-liability match • >> Understand credit risk: How has the LTV and credit profile of your portfolio changed over time? • >> Understand eligibility: How your loans were underwritten and how they perform will determine possible buyers • >> Understand liquidity: Selling loan portfolios is data-intensive and time consuming compared to selling bonds/securities

  22. Business Solution: Portfolio Review Service • Components: • Data Integrity Analysis • Risk Assessment with updated Credit Scores • Mark-to-Market Property Value Analysis • Ineligible Loan Summary • Pricing Stratification • Benefits: • Identifies potential credit & interest rate risk • Identifies potential eligible profitable asset sales • Enhances liquidity of portfolio by making loan data readily available • Costs nothing

  23. Turn This… Lender Mortgage Loan Portfolio

  24. Fixed Rate Pricing Stratification …Into This

  25. Single Family Portfolio AnalysisPrepared for: ABC Credit Union February XX, 2010 Note: Selected pages from sample portfolio review using hypothetical data and assumptions For discussion purposes only

  26. Sample Using Hypothetical Data and Assumptions FOR DISCUSSION PURPOSES ONLY Sample Using Hypothetical Data and Assumptions – FOR DISCUSSION PURPOSES ONLY

  27. Sample Using Hypothetical Data and Assumptions – FOR DISCUSSION PURPOSES ONLY

  28. Sample Using Hypothetical Data and Assumptions – FOR DISCUSSION PURPOSES ONLY

  29. Sample Using Hypothetical Data and Assumptions – FOR DISCUSSION PURPOSES ONLY

  30. Sample Using Hypothetical Data and Assumptions – FOR DISCUSSION PURPOSES ONLY

  31. Sample Using Hypothetical Data and Assumptions – FOR DISCUSSION PURPOSES ONLY

  32. Sample Using Hypothetical Data and Assumptions – FOR DISCUSSION PURPOSES ONLY

  33. Sample Using Hypothetical Data and Assumptions – FOR DISCUSSION PURPOSES ONLY

  34. Sample Using Hypothetical Data and Assumptions – FOR DISCUSSION PURPOSES ONLY

  35. Sample Using Hypothetical Data and Assumptions – FOR DISCUSSION PURPOSES ONLY

  36. Fannie Mae’s Investor Channel • The Investor Channel’s mission is to: >> Provide greater liquidity to our lender partners >> Purchase seasoned non-standard products >> Help lenders identify risks and opportunities in their portfolio >> Customize solutions to address individual lender concerns

  37. Summary >>The market continues to be volatile and the future is uncertain >>There are significant and growing concentrations of mortgages on balance sheets; credit and interest rate risk must be managed >>Loan portfolios must be actively priced, measured, and managed - just like bonds >>Credit unions should know what they own, the value of assets, and how potential buyers will view the quality of mortgages on their balance sheet >>A Fannie Mae portfolio review can provide you with a comprehensive analysis of your mortgage assets at no cost to you

  38. Thank You For Your Time • Feel free to contact us directly: • Laurel Davis, Vice President, Investor Channel, 202.752.8309, laurel_davis@fanniemae.com • Fannie Mae Investor Channel Senior Account Executives: • Ralph Bonner, West & North Central, 312.368.6228, ralph_bonner@fanniemae.com • Mike Matz, East & South Central, 202.752.3324, michael_matz@fanniemae.com • Or contact your Fannie Mae Account Manager • Visit www.efanniemae.com for more information: • Single Family / Execution Options /Bulk Transactions & Portfolio Review Service

  39. CUNA Lending Council Conference October 17-20, 2010 Caesars Palace | Las Vegas, Nevada The premier education and networking event of the year for credit union lending professionals. cunalendingcouncil.org

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