Current Mortgage Finance Executions July 8, 2016 Donald Peterson - - PowerPoint PPT Presentation

Current Mortgage Finance Executions

July 8, 2016

Donald Peterson donald.peterson@raymondjames.com

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HFA SINGLE FAMILY MRB ISSUANCE (2000 – 2015)

Source: Thomson Reuters. Does not include NIBP Program Bonds.

HFA single family bond volume in 2014 and 2015 was approximately 20‐30% of volume in 2007 peak.

$‐ $5 $10 $15 $20 $25 $30 Volume ($ Billions)

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LOOKING BACK AT LOCAL HFA SINGLE FAMILY BOND ISSUANCE

Traditionally HFAs issued tax‐exempt mortgage revenue bonds (MRBs) to provide funds (up‐front) to allow HFAs and their lending partners to originate mortgage loans over a limited origination period (less than 42 months). HFA would fund up‐front COI, reserves and negative arbitrage.

• Limited risk to HFA (recoupment of COI and negative arbitrage).
• Mortgage rate “locked‐in” – lenders had generous time allotment to deliver loans
• Premium price of Bonds was potential source of DPA.
• HFA benefits from issuer fee and residual (determined by mortgage prepayment speeds).

2000‐2004 – Private Placements & Public Sales of Bonds

• Variety of Local HFA bond structures “privately placed” (rather than publicly sold) to Fannie

Mae, such as the tax‐exempt forward delivery to eliminate negative arbitrage

• Publicly sold structures: serial bonds/premium PAC bonds/term bonds

2005‐2007 – Monthly “Pass‐Through” Tax‐Exempt Single Family Bond Issues

• stepped coupon & synthetic stepped coupons to eliminate “negative arbitrage”
• Fannie Mae and Freddie Mac very active bond investors

2008 – Onset of Financial Crisis / Traditional MRB Financing Methods No Longer Worked 2009‐2012 – US Treasury’s “New Issue Bond Program” (NIBP)

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WHY IS SINGLE FAMILY BOND ISSUANCE DOWN?

Post NIBP it has been difficult for HFAs to create competitive single family programs funded through traditional mortgage revenue bonds (MRBs):

• Tax‐exemption at these historically low interest rates is less meaningful.
• Low rates has similar effect on multifamily financings, with lower long‐term rates found

through lenders/direct placements (tax‐exempt mf bonds generally 2 year “escrows”).

• DPA now is the primary distinguishing factor for HFA single family programs.
• For example, the partnership local HFAs have with Florida HFC enabled local HFAs to help

use the subprime settlement moneys as DPA, driving up production for many local HFAs. HFAs can create a competitive single family mortgage product using MRBs generally by subsidizing the new $$ mortgages through (1) a refunding component (though there will be fewer opportunities post 2017), (2) resolution/balance sheet strength, or (3) 0% participations from prior MRBs.

• Vast majority of single family MRBs issued in the last few years have been issued by state

HFAs; only a handful of local HFA single family MRBs have been issued since NIBP ended. In the current market, most HFAs have chosen “TBA” (a non‐bond execution) over MRBs, which is why MRB volume is only a fraction of what it was in 2007.

• Notably, many HFAs using TBA are experiencing their best single family production levels
• ever. For local HFA clients, RJ generally has seen higher loan volume & higher HFA program

income for TBA programs over the past 2‐3 years, than for their prior bond programs.

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WHY ARE HFAS USING “TBA” TO FUND SINGLE FAMILY PROGRAMS?

TBA, either directly or through a 3rd‐party program (such as Raymond James’ “Turnkey” program), has become the primary funding mechanism for state and local HFA single family programs nationwide, instead of through MRBs, due in large part to:

• TBA/“Turnkey” provides a higher NPV return ($$) to the HFA using TBA than through tax‐

exempt bonds (assuming same mortgage rate and loan type);

• TBA/“Turnkey” allows broader homebuyer universe (e.g., borrower income not required to

include household income; no 1st‐time homebuyer req’t) and less paperwork for lenders (e.g., Form 1003 to establish 1st‐time homebuyer status (3 years tax returns not a req’t)); and

• Lenders find it more user friendly since TBA is how most mortgage originators fund and

hedge their single family programs, so the terms are familiar (more so than a bond program).

• In the current market, while tax‐exempt markets provide challenges, TBA‐based programs

enable HFAs to:

• Support mission of helping low‐income borrowers that have difficulty obtaining credit;
• Earn income; and
• Maintain lender networks for when tax‐exempt MRBs return:
• Lender networks are a key component to any HFAs success, and maintaining these

networks is vital to the future success of an HFA’s single family program.

• When MRB programs do come back in force, TBA can still be a viable product
• ffering for HFAs (broader income limits / non 1st‐time homebuyer).

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WHAT IS TBA?

TBA stands for “To Be Announced” and it is a forward sell/buy trade of federally‐insured MBS (Ginnie Mae, Fannie Mae, or Freddie Mac) with a stated coupon for an explicit price on a date in the future; the actual MBS security to be bought/sold is not known at the time the initial trade is entered into, and such MBS security is “to be announced” 48 hours prior to actual settlement.

• TBA is not a municipal security, so there are no tax‐exempt bond restrictions or overlays.
• No volume cap requirements / no IRS tax‐exempt overlays (e.g., 1st time homebuyer).
• Mortgage originators and banks often use TBA to hedge interest rate risk of their mortgage

programs (hedges risk of rates moving between time of loan reservation and MBS sale).

• TBA is the 2nd most liquid bond market in the U.S. (behind U.S. Treasuries).
• Notably, following the Lehman crisis the TBA market functioned with relatively little

volatility, while tax‐exempt MRB markets experienced significant dislocation. Direct TBA trades do expose the HFA to pipeline risk (e.g., fallout risk) and related market risks which is why over 20 state HFAs and nearly all active local HFAs using TBA have partnered with a 3rd‐ party provider that shields the HFA from such market and pipeline risk. TBA contracts are considered “investment derivatives” since one or more factors are not known at the time the contract is entered into, causing HFAs that enter into TBA trades directly to disclose such TBA contracts as “derivatives” on their audited financial statements.

• HFAs using 3rd‐party programs, such as “Turnkey” which shield HFA from 100% of such risks,

do not have the same accounting treatment because the HFA is not entering into TBA trades.

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For tax‐exempt single family MRB programs, Section 143 of the Internal Revenue Code & related bond regulations impose a number of stringent requirements, including (1) income limits, (2) purchase price limits, (3) first‐time homebuyer requirement, and (4) prohibiting pairing loans with MCCs.

• TBA‐based market rate programs, on the other hand, are funded on a taxable basis, and therefore many of

those MRB requirements can be relaxed or eliminated.

• Homebuyer income limit in MRBs includes all persons in “household”, but for TBA only borrower’s

income needed to be considered (TBA expands eligible borrower universe);

• For HFAs seeking to broaden the universe of eligible homebuyers it is seeking to serve, TBA

programs can allow non‐1st‐time homebuyers (e.g., low‐moderate income);

• TBA also makes qualifying as a 1st‐time homebuyer easier (more lender friendly) by not

requiring 3‐years of tax returns (e.g., Form 1003 attestation);

• Because no volume cap is used for a TBA program, eligible borrowers can pair TBA‐funded

mortgage loans with MCCs (which isn’t allowed with tax‐exempt MRBs).

• MRB programs generally are based on a stated $$ amount (e.g., $25mm), for a stated mortgage rate (e.g.,

4.00%), and for a defined origination period (not to exceed 42‐mo’s), and lenders originate MRB loans based

• n a first‐come, first‐served basis.
• TBA‐based programs have no fixed program amount, mortgage rate, or origination end date;
• Rates are set by the HFA each day/week, based on then current markets (so an HFA’s mortgage rate

is better able to track current mortgage rates to remain competitive);

• Program is “evergreen” (continuously funded through TBA with no set $$ ceiling); and
• Lenders do not have to worry about funds running out / TBA allows continuous lending.

DIFFERENCES BETWEEN BOND & TBA-BASED PROGRAMS

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PAC Bond Structure Turnkey/TBA Serials, PAC, Terms Origination Period 6 months ‐ level Continuous Program/Bond Par 25,000,000 25,000,000 Premium ‐ 1,225,000 Total 25,000,000 26,225,000 Mortgage Rate 3.770% 3.750%

Full‐Spread

Mortgage Yield 3.775% NA Bond Yield 2.650% NA Spread 1.125% NA PV Issuer Fee/Residual (100% PSA) 1,115,585 NA PV Issuer Fee/Residual (200% PSA) 1,015,928 NA PV Issuer Fee/Residual (300% PSA) 943,204 NA PV Premium Raised ‐ 1,225,000 DPA Grant ‐ ‐ Reserve Fund (310,000) NA COI (est. $13/bond) (325,000) NA NPV (100% PSA) 480,585 1,225,000 NPV (200% PSA) 380,928 1,225,000 NPV (300% PSA) 308,204 1,225,000

TBA income not subject to PSA experience

COMPARISON OF BOND & TBA/“TURNKEY” EXECUTION

Rates as of 6/28/2016.

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ANNUITIZING TBA/“TURNKEY” INCOME

• MRB income generally is received over the life of the bond (“annuity income”) based on the

amount of bonds/mortgages outstanding from the allowable up to 1.125% spread.

• TBA income generally is a one time, up‐front amount paid to the HFA based on the difference

between the cost to fund the underlying loan and the TBA price it sold the MBS for.

• HFAs that wish to can “annuitize” the up‐front TBA profits. For example, in comparing from the

prior slide the $480,585 NPV of an MRB transaction (at 100% PSA) to TBA/“Turnkey”, if one were to invest the $1,225,000 of up‐front TBA/“Turnkey” income in a 30‐year U.S. Treasury with a 2.27% yield, here is the annuity and NPV comparison: Comparison of MRB Annuity & TBA Annuity INCOME/(EXPENSE) TBA/“TURNKEY” BONDS (100% PSA) 1st 10 Years $ 278,075 $ (193,028)* Years 11‐20 278,075 109,296 Years 21‐30 1,503,075** 1,468,137 TOTAL $2,059,225 $1,384,405

TBA difference: NPV @ 3% Discount Rate $1,048,918 (less) $ 480,585 = $568,333

* Reflects $635,000 contribution at MRB closing to cover COI, reserves, and negative arbitrage for 6 months (level) origination. ** Includes $278,075 of interest income and repayment of $1,225,000 of principal upon T‐Bill maturity in 2046.

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PLANNING AHEAD IN A COMPLEX TIME

Data Source: 1) 10‐Yr UST (FORECAST 1‐Yr Prior) – Bloomberg consensus projection of the 10‐Year UST rate, 4 quarters ahead, based on economic forecasts from approximately 70 firms (see function “ECFC”); 2) 10‐Yr UST (Actual) is from the US Federal Reserve’s H‐15 Historical Data for the 10‐Year Constant Maturity UST; 3) Net Fed TBA Commitment based on publically released NY Federal Reserve data for MBS purchases and sales.

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DISCLAIMER

The information contained herein is solely intended to facilitate discussion of potentially applicable financing applications and is not intended to be a specific buy/sell recommendation, nor is it an official confirmation of terms. Any terms discussed herein are preliminary until confirmed in a definitive written agreement. While we believe that the outlined financial structure or marketing strategy is the best approach under the current market conditions, the market conditions at the time any proposed transaction is structured or sold may be different, which may require a different approach. The analysis or information presented herein is based upon hypothetical projections and/or past performance that have certain limitations. No representation is made that it is accurate or complete or that any results indicated will be achieved. In no way is past performance indicative of future results. Changes to any prices, levels, or assumptions contained herein may have a material impact on results. Any estimates or assumptions contained herein represent our best judgment as of the date indicated and are subject to change without notice. Examples are merely representative and are not meant to be all-inclusive. Raymond James shall have no liability, contingent or otherwise, to the recipient hereof or to any third party, or any responsibility whatsoever, for the accuracy, correctness, timeliness, reliability or completeness of the data or formulae provided herein or for the performance of or any other aspect of the materials, structures and strategies presented herein. This Presentation is provided to you for the purpose of your consideration of the engagement of Raymond James as an underwriter and not as your financial advisor or Municipal Advisor (as defined in Section 15B of the Exchange Act of 1934, as amended), and we expressly disclaim any intention to act as your fiduciary in connection with the subject matter of this Presentation. The information provided is not intended to be and should not be construed as a recommendation or “advice” within the meaning of Section 15B of the above-referenced Act. Any portion of this Presentation which provides information on municipal financial products or the issuance

• f municipal securities is only given to provide you with factual information or to demonstrate our experience with respect to municipal markets and products. Municipal

Securities Rulemaking Board (“MSRB”) Rule G-17 requires that we make the following disclosure to you at the earliest stages of our relationship, as underwriter, with respect to an issue of municipal securities: the underwriter’s primary role is to purchase securities with a view to distribution in an arm’s-length commercial transaction with the issuer and it has financial and other interests that differ from those of the issuer. Raymond James does not provide accounting, tax or legal advice; however, you should be aware that any proposed transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and/or legal counsel. Raymond James and affiliates, and officers, directors and employees thereof, including individuals who may be involved in the preparation or presentation of this material, may from time to time have positions in, and buy or sell, the securities, derivatives (including options) or other financial products of entities mentioned herein. In addition, Raymond James or affiliates thereof may have served as an underwriter or placement agent with respect to a public or private offering of securities by one or more of the entities referenced herein. This Presentation is not a binding commitment, obligation, or undertaking of Raymond James. No obligation or liability with respect to any issuance or purchase of any Bonds or other securities described herein shall exist, nor shall any representations be deemed made, nor any reliance on any communications regarding the subject matter hereof be reasonable or justified unless and until (1) all necessary Raymond James, rating agency or other third party approvals, as applicable, shall have been obtained, including, without limitation, any required Raymond James senior management and credit committee approvals, (2) all of the terms and conditions of the documents pertaining to the subject transaction are agreed to by the parties thereto as evidenced by the execution and delivery of all such documents by all such parties, and (3) all conditions hereafter established by Raymond James for closing of the transaction have been satisfied in our sole discretion. Until execution and delivery of all such definitive agreements, all parties shall have the absolute right to amend this Presentation and/or terminate all negotiations for any reason without liability therefor.