We continue to see new issue floating HMBS TBAs (to be announced) trade well out of Urban Financial Group, Generation Mortgage Company, Liberty Home Equity Solutions and Security One/RMS. As we near the end of September with the new program changes about to be implemented, spreads for Saver and Standard have tightened marginally after the two- to three-point dollar price correction in May/June. A lot of this is dealer-led due to strong technicals as institutional investors sat on the sidelines through the quarter’s end, digesting Fed communications and intentions.
While the September Fed announcement shocked most by not tapering, we are much closer to the Fed tapering than easing more, and that will continue to pressure the mortgage basis. Mortgage option-adjusted spreads (OAS) touched negative 50 after the announcement of QE3, but they are currently at 25bps and I expect them to widen as we get more clarity on the unwind of the Fed’s buying.
Most of the floating-rate HMBS have been stripped into HREMIC transactions, with September’s deal volume at $533 million and August’s at $647 million. Bank of America, Stifel Nicolaus, Nomura and RBS have been routinely bringing these transactions
to market. IOs have weakened considerably post May/June and are 16 to 24 ticks wider in dollar price. Seasoned fixed rates are trading
on spread after the correction. Three-year paper is trading in the 70s to swaps, four-year paper is just behind that and one- to two-year paper is trading in the 30s to 50s to swaps, depending on the exact duration. I don’t expect any tightening from here and I am more inclined to think we will widen as the new product rolls out in October.
There aren’t many silver linings in what to expect in the near term. Industry experts have estimated volumes will drop on the order of 50 percent once Financial Assessment is rolled out in January 2014. Investors, admittedly, are a bit weary of the constant changes to the program. The program was changed in 2009 and 2010 and has now been completely overhauled in 2013 after facing the possibility of a complete shutdown. Most troublesome to me is the fact that the Ginnie Mae securitization program does not get correct accounting sale treatment per the SEC and Big Four accounting firms. There has never been a securitization program to my knowledge that doesn’t get sale treatment and we’ve been operating this way for more than two years. I can say with confidence that money center banks and real money participants will be discouraged from entering this space in the future without proper accounting treatment.
As we wait for the product to hit the market, the three new flavors of HECMs that we’ll begin analyzing are: the Libor floating-rate lines of credit that have timing restrictions on incremental draws above 60 percent of the initial principal limit; fully drawn fixed-rate where 100 percent of the principal limit will need to satisfy payoffs and closing costs; and the HECM mini, the closed-end, fixed-rate loan where the borrower chooses a fixed rate and gives up any additional principal limit available to them. All three of the cash flows will be materially longer than what is present in the HECM Standard marketplace today, and I think we can expect originations to come in 70/30 floating rate versus fixed rate.
