Category Archives: Warehouse

Mortgage-Backed Bond Slump Could Portend Liquidity Crunch









The recent lull in the market for securities backed by agency mortgages could be a hint of danger for the bond market, and may ultimately reduce the liquidity for banks to lend to homeowners.

The trading volume for mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae sharply slowed in the first quarter. Meanwhile, issuance has risen, and the amount of outstanding securities is steadily increasing — a combination that is making the market slack, and which could affect the underlying market for mortgages.

Large banks that serve as broker-dealers for these securities have pulled back because of higher capital burdens that they have to bear, said Ron D’Vari, co-founder of the consulting firm NewOak Capital.

“As we’re getting close to the implementation of Dodd-Frank and the Basel III framework, you are seeing capital get more restricted,” he said. “Some banks have gotten out of that trading zone, and the ones that are staying are much more careful about allocating their capital.”

The average daily trading volume for agency MBS has fallen 43% since 2008, its busiest year, to $188 billion last month, according to the Securities Industry and Financial Markets Association. Trading volume has slid the last three months after jumping in January to its highest rate in nearly two years.

This pullback could mean there will be fewer players with the bandwidth to keep the market liquid in a period of stress, D’Vari said. The four largest U.S. banks handle the great majority of the agency MBS broker-dealer business, and they have become more reluctant to take on the large trading positions that keep the market flowing — particularly when the market gets choppy.

Moreover, the reduced trading of agency MBS could lower market profitability, ultimately making less liquidity available for banks of all sizes to make mortgages.

“The reason we had such a good mortgage finance business in the U.S. is that it was backed by the most liquid of markets,” that is, agency MBS, D’Vari said. Now, however, “even the most liquid parts of the market have started to show signs of illiquidity.”

The trading slowdown also coincides with reduced appetite for agency MBS from large entities whose demand has kept the market going in recent years.

The Federal Reserve’s holdings of mortgage-backed bonds grew steadily from October 2012 through this January, when they peaked at more than $1.7 trillion. Its MBS holdings are now about $33 billion below that peak.

Large U.S. commercial banks, meanwhile, have reduced their holdings to $112 billion from a 2008 peak of more than $205 billion, according to Fed data.

Expectations of a rate hike have also dampened MBS trading. With the Fed’s long-awaited rate hike expected later this year, companies are reluctant to take big positions on long-term securities.

“This pending hike forces people to be very hedged; they shut down their activities and don’t stray away from their benchmarks,” D’Vari said.

Meanwhile, Fannie and Freddie have been issuing new MBS at a faster rate this year than last. The GSEs issued $130.5 billion in MBS last month, compared with an average of $82 billion a month last year. The total amount of agency MBS outstanding has increased every quarter since 2011 and reached more than $6 trillion at the end of March, according to SIFMA.

The slowdown in trading, combined with the increase in new issuance, is likely because of concerns about capital and interest rates, rather than the underlying performance of the securities, analysts say. The Bloomberg MBS Bond index, which tracks agency securities,has returned 5.19% over the past year, more than Bloomberg’s indexes that track U.S. Treasury bonds and corporate bonds.

The underwriting of agency mortgages has gotten much stronger since the crisis, and consequently the credit performance of more recent agency loans has been “great,” said Grant Bailey, head of U.S. residential mortgage-backed securities for Fitch Ratings.

“The credit attributes of the recent vintage loans has been quite a bit stronger than precrisis, and the performance has been a lot stronger,” he said.

The pullback by major players could even make agency MBS a buying opportunity for investors, relative to other bonds. Fund managers at DoubleLine, a mutual-fund family, recommended buying agency MBS last month, writing in a research note that the securities should be “part of a solution” for investors looking to diversify away from corporate and U.S. Treasury bonds.

The market for nonagency MBS, meanwhile, has been stable. Last month, an average of $4.4 billion on nonagency MBS was traded every day, the same as in 2011, the first year SIFMA tracked daily trading volume for the securities.

Nonagency RMBS issuances dried up nearly completely during the financial crisis, dropping from $507 billion in 2007 to zero in 2009. It has since restarted modestly, and in the first quarter $1.2 billion of nonagency RMBS was issued.

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A La Mode Carves Out Mercury Network for Private Equity Acquisition









Mercury Network, the mortgage lender and appraisal management company software unit of a la mode, was acquired by private equity firm Serent Capital, the companies announced Thursday.

The transaction creates two separate companies: Mercury Network, which develops software for mortgage lenders and AMCs; and a la mode, which retains its software offerings for appraisers, mortgage brokers and real estate agents. The acquisition price for the all-cash carve-out was not disclosed.

Mercury Network boasts customer growth of 375% during the past four years and currently has more than 600 clients, with lenders and AMCs using its technology to manage more than 20,000 appraisal transactions per day, according to a company release.

“We conceived, built, incubated, and eventually spun off Mercury Network entirely inside a la mode, with one clear purpose to protect appraisers from the income-robbing effects of the HVCC and its aftermath, by providing lenders with a compelling alternative to the draconian and ultimately ineffective vendor management models in vogue at the time,” a la mode founder and chairman Dave Biggers said in the release.

“As we now pass that torch to Mercury’s staff and to Serent, we’re confident they’ll continue to push Mercury even further,” he added. “We’re very excited about their future, and of course ours as well, as we’re now able to deploy new resources and focus even more specifically on the appraiser’s side of the lending transaction.”

The carve out of the Mercury Network business took approximately two years and involved transferring Mercury Network’s applications and data onto new servers, according to a source familiar with the transaction. The Mercury Network staff has already relocated to its new headquarters office in Oklahoma City, while a la mode remains headquartered in Naples, Fla., with additional offices in Oklahoma City and Salt Lake City.

In addition to multiple appearances on the annual Mortgage Technology Top 50 Service Providers list, a la mode was the recipient of the 2012 Transforming Valuations Mortgage Technology Award and the 2014 Harnessing Mobile MT Award.

Serent Capital has approximately $600 million in capital under management, including a stake in Dallas-based Optimal Blue, which develops mortgage product and pricing technology. The San Francisco firm was founded in 2008 and generally commits $10 million to $50 million in its investments.

As a standalone vendor, Mercury Network owns the following technologies:

  • Mercury Network, a platform for lenders and AMCs to order appraisals and other property valuation reports
  • Mercury Mobile, a mobile app for appraisers to manage order requests
  • Enterprise Vendor Framework (EVF), an implementation of Mercury Network that lets lenders manage multiple AMCs
  • DataCourier, a portal for delivering and storing completed appraisals, as well as uploading XML reports to Fannie Mae and Freddie Mac’s Uniform Collateral Data Portal
  • Appraisal Quality Management (AQM), appraisal quality control review and scoring software
  • SureReceipts, an electronic signature and document management system

The remaining a la mode product suite includes:

  • Elite System, business management platforms for appraisers, mortgage brokers and real estate agents
  • Total, appraisal form-filling software
  • Total for Mobile, an appraisal data entry and sketching mobile app
  • Mercury Desktop, a portal for appraisers to submit completed orders to both Mercury Network and other appraisal management platforms (the product will be rebranded by the end of 2015)
  • UAD Reader, software to view appraisal PDF that’s embedded in Uniform Appraisal Dataset XML files
  • Pipeline ROI, a website marketing and content management system for mortgage brokers and real estate agents

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Fannie-Freddie Regulator Said to Plan Easing Some Loan Limits









The regulator of Freddie Mac and Fannie Mae plans to ease annual restrictions on their apartment mortgage business to prevent a lending slowdown, according to two people familiar with the matter.

The government-controlled companies, which buy and guarantee mortgages, are on track to reach a $30 billion annual cap in their multifamily business in the third quarter. The Federal Housing Finance Agency intends to tell the companies this week how it will loosen the limits that it had set in January, the people said.

Without an easing of the restrictions, Fannie Mae and Freddie Mac could have to hold back business in the second half of the year, resulting in higher costs to borrowers and less available multifamily credit. Fannie Mae might also have to slow sales of loans to investors. The companies have begun demanding wider interest rate spreads in an attempt to reduce their pace of business.

“Our sense is that the current situation is unsustainable as the lack of market clarity will ultimately have an impact on multifamily credit availability,” said Isaac Boltansky, a policy analyst at Compass Point Research Trading.

Housing officials in the last month discussed several options for relaxing the limits, including raising the caps by $5 billion for each company, said one of the people. They have also considered broadening the criteria to make more mortgages exempt from the limit, the person said.

Lending Surge

FHFA spokeswoman Stefanie Johnson declined to comment.

Fannie Mae and Freddie Mac’s apartment business surged fourfold through April from a year ago, spurred by low interest rates and demand for rental units. Freddie financed $10 billion in multifamily loans in the first quarter, trailing just behind rival Fannie with $10.4 billion, both companies have reported.

The FHFA would be in uncharted territory if it makes changes to the mortgage limits mid-year rather than in January, said Lisa Pendergast, an analyst at Jefferies Group.

“It would be unusual for them to think about raising the caps now, but on the other hand, by summer, they could hit the ceiling,” she said by phone this week. “They may have to shut down origination if that happens.”

Increasing Rates

Fannie Mae and Freddie Mac began tapping the brakes by boosting their costs of borrowing, which may cause business to move to private lenders, according to Willy Walker, chief executive officer at Walker Dunlop, one of the firms’ biggest multifamily lending partners.

“Freddie and Fannie got ahead of themselves, and now they’re trying to temper themselves by raising their rates,” Walker said.

Freddie Mac increased the cost on its 10-year mortgage four times in April, according to data from Walker Dunlop. Freddie Mac’s floating-rate loan cost 62 basis points more by the end of the month, the firm said.

Fannie Mae similarly made its loans more expensive. Spreads on its 10-year mortgage increased a total of 45 basis points from late March to the end of April.

Commercial mortgage lending is booming as demand for rental units fuels multifamily construction. Total lending surged 49% in the first quarter from last year, according to data from the Mortgage Bankers Association. Multifamily mortgages increased 71% in the same period.

Mel Watt

“Everyone in this market will do more this year,” Jeffery Hayward, head of multifamily lending at Fannie Mae, said in an interview.

FHFA’s plan to ease loan restrictions comes five months after its director Mel Watt signaled to Congress that he would control the expansion of the two companies. They were seized by the government in 2008 as they neared insolvency.

“The focus here is not to compete where there is adequate private sector coverage of the multifamily market,” Watt told a House committee in January.

CBRE Group Inc. said last week that the firm’s multifamily lending backed by the agencies has been robust. CBRE Chief Financial Officer James Groch warned during the company’s April earnings call that business could taper off toward the end of the year unless the caps are raised.

“At the current pace they’re likely to hit their caps before year end, which could slow things down toward the end of year unless the caps are increased,” Groch said.

Private Market

A slowdown in multifamily agency mortgages would be a positive development for the private market, according to Lea Overby, an analyst at Nomura Holdings. Fannie Mae and Freddie Mac scoop up the best loans, and their expanded business has meant private buyers, primarily banks, are left picking over the leftovers, she said.

“I am excited about them hitting the cap because it means we’ll have better quality CMBS,” said Overby, referring to commercial mortgage backed securities.

Freddie Mac and Fannie Mae have since last year deployed new strategies to circumvent the limits. They are diverting a small number of loans into exempted categories: affordable and manufactured housing and small-balance loans.

“It is a conscious strategy of ours to grow manufactured housing and small balance loans, in response to FHFA’s scorecard,” said David Brickman, executive vice president of multifamily business at Freddie Mac, adding that the firm plans to boost those categories of mortgages.

Fannie Mae has similarly sought to maneuver around the volume limitations.

“‘Affordable’ can be defined a bunch of ways,” said Fannie Mae’s Hayward. “We have done much more business this year because the market needs us to provide liquidly.”

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