Mortgage

Opinion: Wherever the company switches to securitization, there is a chance

A seismic shift is coming on the secondary market, and if you are an agency direct lender there is a good chance you are already thinking about it.

I am referring to a market update from the U.S. Department of the Treasury and the Federal Housing Finance Agency that will impact the cash window of government-sponsored businesses beginning January 1, 2022. Under the new policy, the GSEs will limit cash, Fannie Mae and Freddie Mac can set a volume of $ 1.5 billion for a period of four quarters – an overall limit of $ 3 billion.

To put the impending impact in perspective, lenders of all sizes, including some of the largest in the country, are delivering checkout windows as the primary business model to GSE. And to underline the matter, many correspondent investors derive prices from GSE cash windows rather than MBS-based pricing models, while also preferring to sell to the cash window itself.

In short, if you're an agency direct lender who has historically exceeded, or is expected to exceed, the $ 3 billion ceiling – even if you're tempted to take it to the record lows of 2020 – you will likely to be affected by this disorder. And while it is, in fact, just a disorder, it doesn't have to be a burden. So often, industry changes like this are viewed in a problematic light and met with concern or even fear. And while it is wise to approach shifts of this magnitude cautiously, it is also important to remember that change usually presents opportunity. Anyone who wants to benefit from this has to be proactive and ready to do the work.

In this case, there is the option of providing some or even all of the loans through a securitization model. In simple terms, the securitization process takes place when lenders swap a pool of loans for an MBS backed by those loans. While securitisations are different from the cash window, they are a solid delivery model for any lender when combined with proper research and preparation. It also offers unique benefits – especially in terms of better control and efficiency.

First, let's consider the most notable differences between the two delivery models. Perhaps the biggest is associated with funding and cash flow implications. One of the most important value propositions for GSE cash window delivery is the reliably fast buy times that the agencies provide. This is the lifeblood of an independent mortgage company. A main concern of such a bank when examining securitization is therefore cash management, which is relevant for pooling cycles and can result in loans remaining in a storage line for a longer period of time.

However, lenders have many options to deal with the money crisis. Fannie and Freddie offer compelling early-stage funding programs, and broker / dealer buyback lines can also be a smart strategy. With proper planning, lenders can take the right approach to keeping sufficient inventory lines available to avoid disrupting their funding needs.

Another point of comparison is the pooling requirements. Achieving best execution on the cash window can be complicated enough, and creating MBS pools adds extra nuance. Single issuer MBS pools require an unpaid principal of at least $ 1 million, plus additional restrictions on the composition of the loan. This can be a challenge when it comes to delivering the credit to the pool you are trying to create compared to what may actually be formed. Pool optimization technologies can be helpful tools to simplify this process. It's also worth noting that the resulting pools of MBS that are formed tend to result in more accurate payouts than what the cash window offers, which increases a lender's bottom line.

The issue here is that securitisations have more assumptions that need to be managed. And while that sounds intimidating, there are a plethora of resources that can help with the transition. Fannie Mae and Freddie Mac provide full support for the process, and commercial pipeline risk management systems can simplify the best execution math and deployment options. Many lenders will remember the intimidation that came with moving from a best effort deployment model to a mandatory model, or the concern of the unknown associated with keeping maintenance for the first time. Change always comes with mounting pain, but in the case of a securitization, you get a fair share of the rewards in return – not to mention the excitement that comes with creating your own pools.

Initially, securitization gives lenders the benefit of better knowledge and control. This is the case for several reasons – closer relationships with broker-dealer partners, more direct understanding of the impact of credit profiles on final pricing, and more transparency into the individual components of pricing.

From a risk management perspective, MBS securitisations can be a more elegant hedging offer that you can also pass on to your management team. This is because they provide a more predictable cash flow point in time between pool sale and hedge settlement, as well as better visibility into upcoming model changes like buy-up / buy-down grids. This means more insight into the forecasted daily and monthly changes in profit and loss (P&L) and a better mapping of the impact of different inputs on the bottom line.

There are additional benefits in terms of operational efficiency and income statement. Securitization provides a more predictable delivery schedule that implements scheduled settlements that can be defined by the lender. As mentioned earlier, the delivery model also offers the ability to increase certain set payouts by pooling with a single issuer, as well as reducing explicit early payout fees, bid-ask spreads, and hedging costs. In addition, lenders have much more control and insight into the inputs that influence their valuations, reducing the extent to which they rely on opaque interest sheets and investor pricing models.

Aside from the benefits and differences, the most important thing to emphasize is that the move to securitization should be taken seriously but not intimidating. After all, it's nothing new. The industry was so active for many years. Securitisations can be achieved with appropriate preparation and offer enormous potential for future-oriented, ambitious lenders.

As an industry, this is an exciting moment. We can either take the opportunity and get to work, or let fear get the best out of us.

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