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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