In a widely expected move, FOMC officials increased the Fed Funds rate by 25 bps to a target range of between 50 and 75 bps. Higher financing costs on warehouse lines will reduce net interest margins for whole loan investors unless there is a commensurate rate increase for borrowers. Platforms are expected to pass on some or all of the increase in borrowing costs to consumers to demonstrate the resiliency of the business model to small changes in interest rates.
Much like the beginning of 2016, Fed officials expect several rate increases in the new year as the economy approaches full employment. However, we note that over the life of the current expansion officials have consistently over-estimated the pace of GDP growth and inflation and therefore the pace of rate increases has been slower than expectations .
Headlines this week centered on continued partnerships between banks and non-banks. Apple Pie announced a deal with Fifth Third. OnDeck shares soared after a new warehouse line with Credit Suisse underscoring the importance of financing and liquidity to the non-bank sector.
SoFi Mortgage Trust 2016-1 (SFPMT 2016-1)
This week, SoFi priced its inaugural residential mortgage-backed securitization, which is backed by a $169 million pool of first-lien, fixed-rate, prime residential mortgage loans originated by SoFi. SFPMT 2016-1, led by Barclays, will issue four classes of super senior notes, and two tranches of supportive senior notes.
The collateral pool consists of fully-amortizing mortgages (FRMs) with weighted average loan age (WALA) of 8 months. The mortgage pool is split into two groups: Group 1 consists of loans with amortization terms of approximately 30 years (78.2%) and Group 2 is comprised of 15-year amortizing loans (21.8%). SFPMT 2016-1 employs a traditional senior-subordinate, shifting-interest structure consistent with other prime securitizations. However, Group 1 and Group 2 senior certificates will be backed by collateral from each pool, respectively. The subordinate certificates will be cross-collateralized between the two pools. (This is generally known as a Y-structure.)
Prime Jumbo Deals Benefit from Strong Collateral Performance
Still small relative to its peak size in 2007, the prime jumbo RMBS market continues to grow since the Great Recession, aided by strong credit fundamentals in residential mortgage market. Since 2010, the market has issued approximately $40 billion of prime jumbo securitizations dominated by bank players like J.P. Morgan and Credit Suisse, with combined new issuance market share of over 50%.
The performance of the jumbo prime securitizations has been extremely impressive post the Great Recession with approximately 5 bps of 60+ days delinquency rate. The stellar credit performance is due to tightened underwriting standards and positive loan attributes, such as low loan-to-value (LTV) and debt-to-income (DTI) ratios, and others.
Securitization of Qualified Mortgage (QM) Pool is Exempted from Risk Retention Rules
All loans in SFPMT 2016-1 collateral pool are designated as QM. The Dodd-Frank Act requires mortgage originators to “make a reasonable and good faith determination based on verified and documented information” of a borrower’s ability to repay. The qualified mortgage (QM) rule provided lenders with a safe harbor against litigation for mortgages that meet QM standards. The key requirements for qualified mortgage (QM) are 1) having limited points and fees (under 3%), 2) a term of 30-years or less, 3) no interest only loans, negative amortization, or balloon payments, and 4) a total DTI max of 43%.
We highlight two important benefits from issuer’s perspective for QM designation. Issuers are 1) insulated from claims and defenses by borrowers due to safe harbor, and 2) are not required to retain 5% of capital structure per the credit risk retention rule. Nevertheless, SoFi intends to retain risk in the transaction.
Collateral Quality of SFPMT 2016-1 is One of the Strongest in 2016
Unlike traditional RMBS underwriters, SoFi incorporates additional criteria such as Free Cash Flow (FCF) and Real Excess Cash Flow (REC) into its underwriting process. REC measures a minimum residual income after payment of housing expenses, taxes, debt obligations, and estimated discretionary and cost of living expenses based on the borrower’s location. SoFi assesses the borrowers’ liquidity position to ensure that they have consistent cash excess including their mortgage payments.
Besides this novel underwriting criteria, SFPMT 2016-1 also has a number of strong collateral characteristics that mitigates potential credit risk. For instance, its collateral pool has one of the lowest weighted average loan-to-value (LTV) and debt-to-income (DTI) ratios amongst recent prime jumbo deals.
Fed Fund Rate Hike led to Wider Pricing for SFPMT 2016-1
The Federal Reserve on Wednesday sent its key short-term interest rate up by a quarter of a percentage point. FNMA 30yr conventional loan pool with 3.0% coupon trades around at 3.3% yield today vs 2.6% yield a month ago. Due to the recent interest rate hike and other factors, SFPMT 2016-1 was priced wider than other recent comparable transactions. For instance, the Sequoia deal SEMT 2016-3 was priced over 100 basis points tighter over a month ago due to changes in the rate environment and other factors.
Issuers use sophisticated data & analytics, such as those offered by PeerIQ, to measure and manage rate and spread risk which can have a significant impact on P&L during the warehouse period.
We are excited about the inaugural prime jumbo securitization from SoFi. SoFi has illustrated its ability to grow through value-added origination across verticals, starting with student loan refinance, unsecured consumer loans, and then mortgages. The event confirms our belief that the FinTech space is a diverse and growing market with additional verticals for product expansion.
- SFIG Vegas on February 26-March 1.
- LendIt on March 6-7 in New York.
PeerIQ in the News:
- The Grapevine (AB Alert, 12/9/16) Follow-on coverage of PeerIQ TransUnion partnership and PeerIQ’s plans to further increase engineering headcount.
- SoFi Prepares to Launch First Mortgage Securitization (Housing Wire, 12/12/16) SoFi plans to sell around $170 million in RMBS.
- Fifth Third Signs New Banking Partnership With ApplePie Capital (WSJ, 12/12/16) Fifth Third Bancorp is backing startup online lender, ApplePie Capital.
- Rising Rates Ripple Through Mortgage Market (WSJ, 12/17/16) Interest rates on adjustable-rate mortgages and home equity lines of credit are expected to creep up.
- Study Shows Banks are Barely Earning Cost of Capital (Business Insider, 12/7/16) Author argues banks must undergo “fundamental transformation.”
- Build vs. Buy Takes on New Meaning in Digital Mortgage Era (American Banker, 12/9/16) As an increasing number of startups bring new innovations to market, the opportunity to acquire a company and all its technology expertise has emerged as an attractive alternative.
- OnDeck gets $200 million from Credit Suisse (BusinessInsider, 12/13/16) OnDeck shares soar after receiving credit facility from Credit Suisse.
- R.I.P. Bond Bull Market as Charts Say Last Gasps Have Been Taken (Bloomberg, 12/15/16) Reports on the death of the bond market rally may be greatly exaggerated.
- Deutsche Program to Blend Prosper Pools (AB Alert, 12/9/16) DB plans securitization program with major buyers of Prosper’s personal loans to create a shelf entity that they could tap for asset backed bond financing.
- Credit-Card Rates Are Going Up and May Keep Rising (WSJ, 12/16/16) Card debt could grow even more expensive for consumers next year if the Fed follows through on plans to keep moving rates higher.
- How Donald Trump’s New Top Economic Adviser Views the World (WSJ, 12/14/16) Gary Cohn, No. 2 executive at Goldman Sachs, weighs in on monetary policy, China, inversions and other hot-button policy issues.
- The Great A.I. Awakening (NYT, 12/14/16) How Google used artificial intelligence to transform Google Translate.