Mortgage Strategies in the Current Economic Environment. Katie Hopkins SVP, Investment Strategies

Transcription

1 Mortgage Strategies in the Current Economic Environment Katie Hopkins SVP, Investment Strategies

2 Mortgage Market Trends page 2

3 Limited Mortgage Opportunities 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 page 3

4 Still worthwhile because 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 page 4

5 Cashflow Comparison: All or Nothing vs. Monthly 5Yr NC 3Mo 15yr 3% MBS

6 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 page 6

7 1. GROCERY SHOPPING 2. SPEND TIME WITH FAMILY/FRIENDS 3. WATCH STORAGE WARS

8 99. TAKE SPARE CHANGE TO COINSTAR 100. CALCULATE THE PRESENT VALUE OF MY FUTURE CASHFLOWS USING SEVERAL DIFFERENT REFINANCING SCENARIOS

9 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 page 9

10 Rates Impact Refis/Prepays; Inverse Relationship Refi Index and Rates Refi Index Refi Index 30yr Mtg Rate 15yr Mtg Rate Mortgage Rates page 10

11 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 page 11

12 Prepayment Speeds Vary by Coupon Historical Prepayment Speeds FNCI 3.5 All FNCI 3 All FNCI 2.5 All 20 C P R but historical relationships have been affected by the credit crisis 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 page 12

13 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 page 13

14 Prepayment Speeds by Product Type Historical Prepayment Speeds FNCI 3.5 All FNCT 3.5 All FNCL 3.5 All 20 C P R 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 page 14

15 Identify Collateral Concentrations 15

16 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 page 16

17 Batman and Robin s To Do List

18 Batman and Robin s To Do List

19 Batman and Robin s To Do List

20 Batman vs. Robin: Refi Incentive? Loan Amount Total Interest Savings Monthly Savings Time $500,000 $54,245 $151 2 years $100,000 $10,849 $30 9 years page 20

21 Pow! page 21

22 Cohort Comparison Tab Maps each pool or CMO to a collateral type (ex: FNCI 3% 2011) and compares to collateral averages 22

23 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 page 23

24 Prepayment Speeds by Vintage Historical Prepayment Speeds FNCI FNCI FNCI C P R 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 page 24

25 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 page 25

26 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 page 26

27 Servicer Example: Mortgage Investors Corp Solution: Diversify, diversify and DIVERSIFY page 27

28 Descriptive Information Displays: Loan Count WALA and Vintage Third Party Origination (TPO) Top 2 Geos Purpose: Purchase vs. Refi Top Servicer and Percentage 28

29 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 page 29

30 15yr Market Overview Conventional 15yr Outstanding Balance Amt Outstanding in Billions Coupon page 30

31 30yr Market Overview Conventional 30yr Outstanding Balance Amt Outstanding in Billions Coupon page 31

32 HARP 2.0 Impact Since it s inception in December of 2011, speeds on eligible pools have increased CPR page 32

33 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. 33

34 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 34

35 Prepay Scenarios Yield Tab This w Book Gain/Loss Calculations Average Life and Yield Calculations 35

36 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 36

37 Relative Value: The Fed s Leftovers Meatloaf AGAIN? Hybrid ARMs 20yr MBS Off the Run Collateral page 37

38 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 page 38

39 20yr Collateral page 39

40 Relative Value: Off the Run Collateral High LTV, Relo, Jumbo Benefit: slightly DISLOCATED from raterelated behavior page 40

41 Relocation Loans may Prepay Without Rate Incentive 50 Historical Prepayment Speeds C P R FNRE FNCL 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 page 41

42 FGLMC Buyout Speeds Minimal page 42

43 GNMA Collateral: Higher Buyout Speeds page 43

44 CMO Advantages 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 page 44

45 Jumbos/30yr/High LTV Historical Prepayment Speeds FNJMCK FNCL FNHLCQ C P R 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 page 45

46 Three Options: TBA vs. High LTV vs. Jumbo = small bid/ask spread, more liquid High = slower and more stable speeds Lower price = 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. page 46

47 Conclusion 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 page 47

48 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.