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2015 HFA INSTITUTE:
SINGLE-FAMILY FINANCING ESSENTIALS,
PART 1: FINANCING OPTIONS
Funding Single Family Programs through MBS/TBA Sales
Presented by Ansel Caine
January 15, 2015
HFA Transition from MRBs to MBS Sales
Caine Mitter HFA Activity
2011
2012
2013
2014
■ Traditional MRB
■ Pass-Through MRB
■ MBS Sale
$21 mm
$1,277 mm
$422 mm
$396 mm
$527 mm
$367 mm
$148 mm
$1,629 mm
$309 mm
Issuance activity where Caine Mitter advised on MRB sale or managed pipeline / bid MBS – includes financing activity by 21 HFAs
2012
HFA Industry
2013
■ MRB
■ MBS/Loan Sale
50%
50%
67%
33%
Source: “New Financing Tools Pose Few Risks to HFAs”, Moody’s Investors Service, June 5, 2014
Advantages of MBS Sale Relative to MRB
Pricing
Transparency/Liquidity
 Since 2008, the MBS secondary market has
provided better execution than the MRB primary
market
 2014 average daily trading volume:
Flexibility
 Many loan products do not qualify for tax
exception, including:
 MCC
 Refinance
 Non-first time homebuyer
Simplicity
 Once set up, MBS/TBA programs are simpler
than MRB programs
 Less paperwork
 No upfront, out-of-pocket cost per loan
 Routine, streamlined management
process
 MBS: $178 billion
 MRB: <$1 billion
 MBSs trade with low bid/ask spreads and close
to the “screen”
Forward Delivery
 Robust TBA market allows HFA to buy and sell
agreements for future delivery at low cost
Relative Price Changes in Recent Months
Net Income Comparison of MRB vs. MBS Sale
November 2014
5.0
Key Interest Rates
4.0
11/6/14
3.0
NPV
(% loan
amount)
MBS
sale
2.0
MRB
1.0
0.0
100% PSA
200% PSA
Prepayment Speed
300% PSA
10y UST
2.39
GNMA
2.84
10y MMD
2.18
10y HFA
2.90
HFA PAC
1.85
Relative Price Changes in Recent Months
Net Income Comparison of MRB vs. MBS Sale
January 2015
5.0
Key Interest Rates
4.0
11/6/14 1/8/15 Change
3.0
MBS
sale
NPV
(% loan
amount)
2.0
1.0
MRB
0.0
100% PSA
200% PSA
Prepayment Speed
300% PSA
10y UST
2.39
2.02
- 0.37
GNMA
2.84
2.59
- 0.25
10y MMD
2.18
1.91
- 0.27
10y HFA
2.90
2.90
+ 0.00
HFA PAC
1.85
2.00
+ 0.15
Relative Price Changes in Recent Months
Net Income Comparison of MRB vs. MBS Sale
January 2015
5.0
Key Interest Rates
4.0
MRB
Full
Spread
3.0
MBS
sale
NPV
(% loan
amount)
2.0
1.0
MRB
0.0
100% PSA
200% PSA
Prepayment Speed
300% PSA
11/6/14 1/8/15 Change
10y UST
2.39
2.02
- 0.37
GNMA
2.84
2.59
- 0.25
10y MMD
2.18
1.91
- 0.27
10y HFA
2.90
2.90
+ 0.00
HFA PAC
1.85
2.00
+ 0.15
MBS sales are subject to interest rate risk
Interest rate risk is inherent in a mortgage pipeline
 HFAs allow borrowers to “lock in” or “reserve” a mortgage rate in advance of closing the loan
 A reservation may remain in the pipeline for 60 days or more before closing
 Rising interest rates and falling prices will reduce unhedged pipeline value or create losses
MBS sales are subject to interest rate risk
Interest rate risk is inherent in a mortgage pipeline
 HFAs allow borrowers to “lock in” or “reserve” a mortgage rate in advance of closing the loan
 A reservation may remain in the pipeline for 60 days or more before closing
 Rising interest rates and falling prices will reduce unhedged pipeline value or create losses
10-Year U.S. Treasury Yields
3.00
2.50
2.00
10y UST
Yield
(%)
1.50
1.00
4/16/13
5/16/13
6/16/13
7/16/13
MBS sales are subject to interest rate risk
Interest rate risk is inherent in a mortgage pipeline
 HFAs allow borrowers to “lock in” or “reserve” a mortgage rate in advance of closing the loan
 A reservation may remain in the pipeline for 60 days or more before closing
 Rising interest rates and falling prices will reduce unhedged pipeline value or create losses
MBS Price
at
Reservation:
109.23
MBS Prices
3.00
110
2.50
107
MBS
Price
2.00
104
10y UST
Yield
(%)
1.50
1.00
4/16/13
101
5/16/13
6/16/13
98
7/16/13
MBS Price
at Sale:
102.10
MBS sales are subject to interest rate risk
Interest rate risk is inherent in a mortgage pipeline
 HFAs allow borrowers to “lock in” or “reserve” a mortgage rate in advance of closing the loan
 A reservation may remain in the pipeline for 60 days or more before closing
 Rising interest rates and falling prices are hedged by TBA trade
MBS Price
at
Reservation:
109.23
TBA price
locked:
108.48
TBA Sale Hedges Pipeline Interest Rate Risk
3.00
110
2.50
107
TBA price
received:
108.48
MBS
Price
2.00
104
10y UST
Yield
(%)
1.50
1.00
4/16/13
101
5/16/13
6/16/13
98
7/16/13
MBS Price
at Sale:
102.10
More About TBA
 The term “TBA” refers to a forward trade where a buyer agrees to purchase MBSs
from a seller in the future at a price agreed upon today
 At the time of the TBA trade, the characteristics of the MBSs are limited, the rest are
“To Be Announced” two days prior to trade settlement
 Forward delivery and the ability to satisfy TBA trades with any MBSs of the type agreed
upon allow an HFA to lock in a price at the time of reservation
 Standard TBA market “pair off” and “roll” mechanics create delivery flexibility
 HFAs have used TBA to hedge interest rate risk associated with MRBs, with flexibility to
deliver MBSs
 MRB versus MBS sale economics can be evaluated prior to TBA delivery allowing HFA to
take advantage of best execution on hedged MBSs
Programs Used by HFAs for Pipeline Management
Internal Management
 HFA staff processes pipeline data and collects bids
Pipeline Management Advisor
 HFA hires advisor to process pipeline data and collect bids
Broker/Dealer “Turn Key” Program
 HFA receives best efforts pricing for a broker/dealer
Ansel Caine
Caine Mitter & Associates Incorporated
(212) 686 - 8820
[email protected]
225 West 35th Street, Suite 900
New York, NY 10001