Sad Hill Unearthed?
Our unprecedented in depth coverage of the repo ruckus continues, following up on The Man With No Name in Part 10: Pale Rider?
Inelastic collateral evolved from elastic reserves? There's got to be an answer. One can go look for themselves in "the forbidden zone" at the NYFRB site under the last 20 TOMO's. As Dr. Zaius warned: "don't look for it Taylor, you may not like what you find." Remember distinctions and motives...
For the rest of this here yarn, bare in mind... there are many grades of paper (chit) being shuffled around, at least eighteen we can think of, but for our purposes... In FICC and tri party repo, UST = pristine; Agency debt and MBS (GNMA, FNMA, FHLMC) are UST 2nd cousins or close substitutes; all the way down the scale to private ABS = Alt-A, sub prime; then whole loans sitting at the bottom of the barrel. Speaking of which...
Tuco sipped on his tin cup whiskey and reminisced of the biggest pawn shop East of the Pecos aka the Great Slim Enterprise. Long ago, Slim had sent his sister to lend cash in the repo market, and this is Fannies story...
Fannie Mae is long cash with cash balances funded with equity through mortgage payments which accumulate until Fannie makes month end coupon payments. In the interim, Fannie is working it by lending those cash balances in GCF repo to broker dealers other than the primary dealers.
Above, the machinations of repo. April 11, 2016 - July 10, 2019: Tri Party Repo: Total Agency and UST Volume 1 trln to 2trln; +100%. Over the same period, primary dealers rate of change in blns... RRP: MBS +22; UST +193. Over the last year Oct 10, 2018 to Oct 9, 2019 in blns: Tri-Party: MBS +104; UST +320. GCF: MBS +28; UST +79.
Take away: Motives...between lending - raising cash, renting - sourcing collateral, balancing book and arbitrage thereof, as Keith Jackson might have quipped... there's a whole lotta head knockin goin on out there? As in a whole lotta chit floatin around with a preference for number one son UST over substitutes. Business sure is booming, or is somebody attempting to fill a void of late? As in repo substituting for other functions that it really shouldn't? Back to Slim's sister Fannie...
A spike in o/n GCF rates signals Fannie has either paid a coupon, or for some other reason, she has less cash or desire to lend into that market. And that's when the primary dealers are supposed to saunter in, if they wish or are able to. Why a smaller Fannie? More later, pun intended, moving West...
Tuco chuckled about Fannie and noted: In the post GFC banks and depository institutions were more inclined to dabble in arbs involving less stable alternatives to deposits. To fill that void in direct bank lending and servicing, and drum up more chit to churn for Slim; Freddie, Fannie and Slim's other sister Ginnie (who specializes in lower income loans), had enlisted some outsiders to fill the gap, and pump up the volume...
Above, October 2019 percentage of NON bank originated purchase and refi mortgage paper: US 60%, FNMA 58%, FHLMC 55%, GNMA/FHA/VA 86%. Distinctions: YTD 66% of Agency MBS or UST 2nd cousin paper was non bank originated.
Most non banks do not have access to the FRB's or the FHLB's, which provide short term credit to depository institutions with liquidity needs. Independent mortgage banks (IMB's) are non depository institutions reliant upon cash, unencumbered assets, short term financing such as bank provided "warehouse lines secured by collateral" (which is a form of repo), and the issuance of long term debt. In 2018, IMB's originated 57% 1-4 family, and 56% of refi mortgages, with most being sold upstream to investors such as Slim's family, Fannie, Freddie and two thirds (66%) of Ginnies guaranteed securities were issued by IMB's.
Since 2013, 50% of all mortgage origination and 60% of refi's are non bank originated. September 2019, outstanding securities in the agency market totaled $6.9 trln, FNMA 2.9 trln (42.7%), GNMA 2 trln (29.6)%, FHLMC 1.9 trln (27.7%); an est. 50% of which ($3.5 trln) is non bank originated. Take away: could this third party sourcing and ghosts of the GFC, be a factor in the reduced appetite for Agency MBS?
Tuco reflected: to support their profligate spending and friends in the military industrial complex, the Federal territory had issued many notes (chit) . Due to the surfeit, Slim's brothers chit (as well as Fannies) had seemingly become less desirable of late. This is Freddie and his other sister Ginnie's story.
Above, this is not a Rorschach test. In o/n GCF repo Jan 10, 2018: Agency MBS 100%; UST 0%; no problem with UST's 2nd cousins. 22 months later Oct 9, 2019: Agency MBS 62%; UST 36% a -35% decline in MBS volume share, In term GCF May 9 to Oct 9 MBS -34%. Take away: In GCF repo, over saturation of prime UST grabbing share and/or a sudden distaste for "substitutes" in the "bread" basket?
Putting out a fire with gasoline... Since mid September 2017 the Fed has reduced its balance sheet by $440 bln of UST, $350 bln of Agency MBS, while Fed Agency purchases went to zero. Since January 2019, Agency monthly gross issuance more than doubled from 75 bln to 160 bln, is on track for 1.3 trln, with net issuance reaching GFC levels. But all that issuance isn't good news, because timing is everything...
When mortgage rates are higher, one cashes out since the rate reduction incentive is gone and the only reason to refinance is to take out equity. November 2018 at 4.94%, the cash out refinance share peaked at GFC bubble levels (80%), as cash strapped homeowners tapped their housing ATM. Fast forward eleven months...
September 2019 -145bps at 3.49%, when mortgage rates are lower, the share of cash-out refinances tends to be small, as refinancing allows borrowers to save money by taking advantage of lower rates. The cash out share of all agency refinances went from 80% to Q2 2019: 61% reflecting increased rate refi activity due to collapsing rates.
Oh munificent one, what does this have to do with repo? Patience collateral breath. Mrs. Watanabe and the BOJ who payed 105 on Ginnies chit, receive prepayment from refi's at par. Ouch! Better yet, with an Agency average of 20% cash out refi's, and 40% refi's of late, mortgage servicing rights (MSR's) for banks and non banks suffered. By June 2019, new loan production pricing for conventional loan servicing assets took a 33% hit. Double ouch! But that's not all you get if you act now...
Angel Eye's stoked his pipe hard and asked: Five years on a 15 -30 year chit? So who the hell would want to originate this chit to hold? Slim and none? I don't buy it for a minute, that those banks backed away from lendin, just direct lending. In the GFC, they got caught with all that crap collateral in off book, off shore SIV's. I reckon that's what those warehouse lines is about. I smelled somethin rotten, things are never quite what they seem. Damn them backdoor banker banditos.
Tuco smiled, sipped and said: a low down pack o jackals hidin in the weeds. Backin away from lendin to all but those who rightly don't need it, well to do, speculators, flippers. All the while pipe lining through warehouse lines of credit to the non banks, who then do the banks dirty work by making lower credit type loans. All of which insulates the banks, but puts all the risk back on the non bank investors, who have no backstops, and the taxpayer through Slim's GSE "guarantees". Speaking of guarantees...
More to come as Tuco, Angel Eyes and The Man With No Name are hot on the trail of the infamous Slim in Part 12: The Sad Hill Trio Ride Again? Stay tuned, no flippin.
A Fistful Of Dollars?
For A Few Dollars More?
The Good, The Bad And The Ugly?
A Coffin Full Of Dollars?
A Dollar To Die For?
The Devil's Dollar Sign?
The Million Dollar Bloodhunt?
Blood For a Dirty Dollar?
High Plains Drifter?
Pale Rider?
A Negative Disposition?
A Wayward Italian in Kansas?
First Rule Of Bond Market: You Do Not Talk About Keynes?
Who is left to pick up the pieces of flotsam, jetsam, lagan and derelict in this Sargasso sea of a repo market? You mean without the Fed sheriff behind the window [since Sept 16th], our chances of making repo are slim and none, and Slim just left town?
Tuco, Angel Eyes and The Man With No Name have reunited just in time to track down the infamous Slim in Part 11: Sad Hill Unearthed? In tonight's coffin, preferred collateral, volumes, Agency MBS, non bank originated, rate fluctuations, refi rates, coupons and MSR's.
For the rest of this here yarn, bare in mind... there are many grades of paper (chit) being shuffled around, at least eighteen we can think of, but for our purposes... In FICC and tri party repo, UST = pristine; Agency debt and MBS (GNMA, FNMA, FHLMC) are UST 2nd cousins or close substitutes; all the way down the scale to private ABS = Alt-A, sub prime; then whole loans sitting at the bottom of the barrel. Speaking of which...
Tuco sipped on his tin cup whiskey and reminisced of the biggest pawn shop East of the Pecos aka the Great Slim Enterprise. Long ago, Slim had sent his sister to lend cash in the repo market, and this is Fannies story...
Fannie Mae is long cash with cash balances funded with equity through mortgage payments which accumulate until Fannie makes month end coupon payments. In the interim, Fannie is working it by lending those cash balances in GCF repo to broker dealers other than the primary dealers.
Take away: Motives...between lending - raising cash, renting - sourcing collateral, balancing book and arbitrage thereof, as Keith Jackson might have quipped... there's a whole lotta head knockin goin on out there? As in a whole lotta chit floatin around with a preference for number one son UST over substitutes. Business sure is booming, or is somebody attempting to fill a void of late? As in repo substituting for other functions that it really shouldn't? Back to Slim's sister Fannie...
A spike in o/n GCF rates signals Fannie has either paid a coupon, or for some other reason, she has less cash or desire to lend into that market. And that's when the primary dealers are supposed to saunter in, if they wish or are able to. Why a smaller Fannie? More later, pun intended, moving West...
Tuco chuckled about Fannie and noted: In the post GFC banks and depository institutions were more inclined to dabble in arbs involving less stable alternatives to deposits. To fill that void in direct bank lending and servicing, and drum up more chit to churn for Slim; Freddie, Fannie and Slim's other sister Ginnie (who specializes in lower income loans), had enlisted some outsiders to fill the gap, and pump up the volume...
Most non banks do not have access to the FRB's or the FHLB's, which provide short term credit to depository institutions with liquidity needs. Independent mortgage banks (IMB's) are non depository institutions reliant upon cash, unencumbered assets, short term financing such as bank provided "warehouse lines secured by collateral" (which is a form of repo), and the issuance of long term debt. In 2018, IMB's originated 57% 1-4 family, and 56% of refi mortgages, with most being sold upstream to investors such as Slim's family, Fannie, Freddie and two thirds (66%) of Ginnies guaranteed securities were issued by IMB's.
Since 2013, 50% of all mortgage origination and 60% of refi's are non bank originated. September 2019, outstanding securities in the agency market totaled $6.9 trln, FNMA 2.9 trln (42.7%), GNMA 2 trln (29.6)%, FHLMC 1.9 trln (27.7%); an est. 50% of which ($3.5 trln) is non bank originated. Take away: could this third party sourcing and ghosts of the GFC, be a factor in the reduced appetite for Agency MBS?
Tuco reflected: to support their profligate spending and friends in the military industrial complex, the Federal territory had issued many notes (chit) . Due to the surfeit, Slim's brothers chit (as well as Fannies) had seemingly become less desirable of late. This is Freddie and his other sister Ginnie's story.
Putting out a fire with gasoline... Since mid September 2017 the Fed has reduced its balance sheet by $440 bln of UST, $350 bln of Agency MBS, while Fed Agency purchases went to zero. Since January 2019, Agency monthly gross issuance more than doubled from 75 bln to 160 bln, is on track for 1.3 trln, with net issuance reaching GFC levels. But all that issuance isn't good news, because timing is everything...
When mortgage rates are higher, one cashes out since the rate reduction incentive is gone and the only reason to refinance is to take out equity. November 2018 at 4.94%, the cash out refinance share peaked at GFC bubble levels (80%), as cash strapped homeowners tapped their housing ATM. Fast forward eleven months...
September 2019 -145bps at 3.49%, when mortgage rates are lower, the share of cash-out refinances tends to be small, as refinancing allows borrowers to save money by taking advantage of lower rates. The cash out share of all agency refinances went from 80% to Q2 2019: 61% reflecting increased rate refi activity due to collapsing rates.
Oh munificent one, what does this have to do with repo? Patience collateral breath. Mrs. Watanabe and the BOJ who payed 105 on Ginnies chit, receive prepayment from refi's at par. Ouch! Better yet, with an Agency average of 20% cash out refi's, and 40% refi's of late, mortgage servicing rights (MSR's) for banks and non banks suffered. By June 2019, new loan production pricing for conventional loan servicing assets took a 33% hit. Double ouch! But that's not all you get if you act now...
modeled prepay speeds for 4% coupon conventional loans across the country are into the mid to high teens and may go higher. That means the MSR will basically amortize and disappear in five years or less. - R. Christopher WhalenAs promised above re: less Fannie? Higher refi share, lower payments, less to lend in repo. Concomitant, FNMA and FHLMC have reduced their balance sheets, and are borrowing less in money markets from money market funds. Double whammy. Irony? The bulk of GCF repo (74%) is Agency MBS paper, and less than stable repo rates can cause investors to back off of UST, and more so its 2nd cousins agency MBS substitute paper. Speaking of backing off...
Angel Eye's stoked his pipe hard and asked: Five years on a 15 -30 year chit? So who the hell would want to originate this chit to hold? Slim and none? I don't buy it for a minute, that those banks backed away from lendin, just direct lending. In the GFC, they got caught with all that crap collateral in off book, off shore SIV's. I reckon that's what those warehouse lines is about. I smelled somethin rotten, things are never quite what they seem. Damn them backdoor banker banditos.
Tuco smiled, sipped and said: a low down pack o jackals hidin in the weeds. Backin away from lendin to all but those who rightly don't need it, well to do, speculators, flippers. All the while pipe lining through warehouse lines of credit to the non banks, who then do the banks dirty work by making lower credit type loans. All of which insulates the banks, but puts all the risk back on the non bank investors, who have no backstops, and the taxpayer through Slim's GSE "guarantees". Speaking of guarantees...
More to come as Tuco, Angel Eyes and The Man With No Name are hot on the trail of the infamous Slim in Part 12: The Sad Hill Trio Ride Again? Stay tuned, no flippin.
Recommended Reading:
A Fistful Of Dollars?
For A Few Dollars More?
The Good, The Bad And The Ugly?
A Coffin Full Of Dollars?
A Dollar To Die For?
The Devil's Dollar Sign?
The Million Dollar Bloodhunt?
Blood For a Dirty Dollar?
High Plains Drifter?
Pale Rider?
A Negative Disposition?
A Wayward Italian in Kansas?
First Rule Of Bond Market: You Do Not Talk About Keynes?
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