Download Best execution mechanics: TBA specified pool

SINGLE FAMILY FINANCING ESSENTIALS: MBS & TBA
ACHIEVING TBA
BEST EXECUTION
January 14, 2016
TBA is Good Execution
a simple and important financing tool for HFAs
an effective hedge against changing MBS prices
TBA is an important financing tool for HFAs
Most new HFA loans are financed with TBA
Moody’s*
Caine Mitter
Early 2015
2015
MRB
TBA
MRB
TBA
TBA delivery offers better execution than MRB in most cases
TBA is a simple, flexible means of hedging mortgage pipeline
*
“Evolving Mortgage Funding Strategy Has Mixed Impact on Business Models”,
Moody’s Investors Service, June 30, 2015; “TBA” includes whole loan sales and MBS sales
TBA is an effective hedge against
changing MBS prices
TBA hedges interest rate risk
TBA allows HFAs to lock in MBS price on new loan reservations,
hedging the change in price due to rising interest rates
PRICE
TBA
LOCKED
PRICE
MBS
SALE
PRICE
TIME
Good execution vs. best execution
TBA market is not always best execution
After hedging in the TBA market, HFA does not have to deliver loans
against TBA commitments
TBA market is liquid and flexible
HFAs can easily “pair off” TBA trade to achieve best execution
HFAs can aggregate loans without interest rate risk while determining
how to permanently finance loans
TBA Can Achieve Best Execution
specified pool sales
MRB (mortgage revenue bond) issuance
TBA Best Execution: Specified Pool Sales
Unlocks additional value of HFA loans
TBA pricing is generic
Generic pricing assumes that loans delivered will meet the minimum
requirements of TBA sale
Many HFA loans have slower prepayment speeds than private sector
loans; investors will pay more
TBA Best Execution: Specified Pool Sales
Unlocks additional value of HFA loans
Addition to TBA price for:
HFA DPA loan
up to 0.75%
Smaller loan sizes
up to 2.20%
CRA credit
0.38% or more, depending on demand
New issue GNMA II
multi-issuer pools
up to 0.25% (was >1.00% earlier in 2015)
TBA Best Execution: MRB Issuance
Tax exempt MRBs provide unique opportunities
Full spread can be better execution than generic TBA trade
Swaps allow for better execution than full spread
MRB vs. MBS Sale
PRESENT
VALUE
NET
INCOME
MBS
Sale
zeroes
MRB with swap
Full spread MRB
with zeroes
MRB
PREPAYMENT
SPEED
Achieving TBA Best Execution
TBA  specified pool sale
TBA  MRB issue
Best execution mechanics:
TBA  specified pool
Execution is similar to TBA
Specified pool is delivered against trade on standard settle date
HFA avoids interest rate risk
HFA has already hedged against interest rate risk via TBA
HFA can extract additional income from loans
Specified pool CUSIP and Pool # provided to potential investors
Potential investors determine value over TBA
Competitive sale enhances results
Best execution mechanics:
TBA  specified pool
Pay ups are not affected by TBA price movement
PRICE
TBA
Specified Pool Sale
LOCKED
Original TBA trade
PRICE
Locked
TBA
Price
Spec
Pay
Up
Pool
Current
Price
(Pay
Up +
TBA
Current TBA)
Price
TIME
CURRENT
TBA
PRICE
Best execution mechanics:
TBA  specified pool
Pay ups are not affected by TBA price movement
Buy TBA toCurrent
cancel out
TBA
original
pricinghedge
does not
position,
change
sellnet
specified
income pool
Original TBA trade
Locked
TBA
Price
Specified Pool Sale
buy
sell
TBA
specified
Pay Up
Current
TBA
Price
Current
TBA
Price
Best execution mechanics:
TBA  MRB
TBA can effectively hedge against rising MRB yields
Rising
Pair
offinterest
incomerates
+ MRB
cause
spread
TBA =prices
full spread
to decline and MRB issue to be
below
full
spread Hedge ID to be included in tax law spread analysis
Requires
Qualified
Full Spread
Pair off income =
Locked TBA price –
TBA Price at MRB issuance
Locked
Pair
TBA
Off
Income
Price
TBA Price
at MRB
Issuance
Actual
MRB
Spread at
Time of
Issuance
KEY TAKEAWAYS
TBA is an effective hedge
and good execution
PRESENT VALUE INCOME
4
Best
Execution
3
Best execution requires
more than TBA alone
2
1
More profit ≠ more work
TBA
Full
Spread
MRB
THANK YOU
Patricia Ho
Caine Mitter & Associates Incorporated
[email protected]
(212) 686 - 8820