Who is SIFMA? 3 SIFMA brings together the shared interests of hundreds of securities firms, banks and asset managers. These companies are engaged in communities across the country to raise capital for businesses, promote job creation and lead economic growth The SIFMA Securitization Group (SSG) is engaged in the myriad of market practice, regulatory, and legislative efforts that intersect with the securitization markets. Our goal is to help regulators design a regulatory regime that addresses shortfalls and gaps in previous standards, without impeding a recovery of the securitization market. The SSG advocates market standards to rebuild the securitization markets and, in turn, promote consumer lending. Participants in the TBA market generally adhere to market-practice standards commonly referred to as the Good-Delivery Guidelines. These guidelines cover a number of areas surrounding the TBA trading of agency MBS, and are promulgated by and maintained by SIFMA, through consultation with its members
What is the To-Be-Announced Market and Why is it Important? 4 The TBA market is by far the most liquid, and consequently the most important secondary market for mortgage loans. This liquidity is derived from its vast size and the forward nature of the trading. Standardized market practices and guidelines ensure that securities eligible for the TBA market are homogeneous, which allows buyers and sellers to transact with confidence that knowing the specific identity of a security they will trade, at the time of trade, is not necessary. This allows lenders to sell their loan production on a forward basis, in some cases before MBS pools are formed, and hedge risk inherent in mortgage lending. Given the size of the market of eligible securities, buyers and sellers are able to trade large blocks of securities in a short period of time. This allows investors to enter and exit the market as desired, and creates vast liquidity. The liquidity of the TBA market creates efficiencies and cost savings for lenders that are passed on to borrowers in the form of lower rates and broad availability of mortgage products, and helps to maintain a national mortgage market. Importantly, the TBA market allows lenders to lock-in rates for borrowers. Because of all of the above, the TBA market is a benchmark for all mortgage markets – it is the reference by which other mortgage markets and products are priced.
5 1.A lender makes loans to borrowers. 2.The lender pools groups of loans with similar characteristics to collateralize securities, or sells the loans to another institution, such as a bank or one of the GSEs. 3.The loans are sold to a trust, which will be the issuer of the MBS. 4.Once securitized, the MBS can be sold to investors, or retained as investments. How are MBS Created? Investor Borrower A Borrower B Borrower C $ Mortgage $ $ $$$ MBSMortgage $$$ Trust 23 1 Bank A 2 3 1
US Housing Overview 6
How the Securitized Mortgage Market Compares to the Rest of the U.S. Bond Market 7 In 2010, $1.7 trillion of agency MBS was issued compared to only $18 billion of non-agency. The only non-agency securitization to fund newly originated loans in 2010 was $222 million. The remaining $17.8 billion were resecuritizations. In 2011, the average amount of agency MBS that traded each day was $313 billion. Only Treasuries had a higher trading volume. Sources: Treasury, Federal Reserve, Federal agencies, Dealogic, Thomson Reuters, Bloomberg, Loan Performance and SIFMA
The U.S. Mortgage Market and the Importance of Securitization 8 Source: Federal Reserve Housing related investment has averaged approximately 15% of U.S. GDP over the last 20 years. The size of the mortgage market has previously exceeded, and is currently nearly equal to the total size of bank balance sheets. There is not enough capacity in the U.S. bank balance sheets to fund our nations housing stock.
What is the Breakdown of the Mortgage Market? 9 There were $13.8 trillion mortgages outstanding in the United States at the end of % of these are home mortgages ($10.5 trillion).
Funding the U.S. Mortgage Market: Two Perspectives 10 67% ($7.1 trillion) of home mortgages are held in a GSE portfolio or securitized (agency and non- agency). The securitized home mortgage market can be split between agency and non-agency. The agency MBS market is more than four times the size of the non-agency market. 81% of MBS are in the form of an agency pass-through or CMO. Holders of Home Mortgages in the United States 2010 Source: Federal Reserve
11 Who Holds Agency MBS? Sources: Federal Reserve, Treasury, WSJ, SIFMA Total: ~$5.5 trillion Banks, pension funds, insurance companies, and foreign investors are the most significant non-U.S. government investors. U.S. bank holding companies and the Federal Reserve hold almost half of the total amount. Most of these investors are rates investors – not credit risk investors. They may be limited to non-credit risk investments by investment policy or by choice.
U.S Mortgage Market In a Global Context - Size 12 Outstanding Mortgage Debt (In Euros, 2010) Source: Hypo.org The size of the U.S. mortgage market exceeds the total European market In Europe, 70% of residential mortgages are held in raw loan form on bank balance sheets, 20% are funded by covered bonds, and 5% are funded by securitization.
TMPG Fails Charge 13
Formed to Support the Integrity and the Efficiency of the Treasury, Agency Debt, and Agency Mortgage-Backed Securities (MBS) Markets TMPG has published the following guidance to market participants, Best Practices for Treasury, Agency Debt, and Agency Mortgage-Backed Securities Markets and fails charge trading practice recommendations for the Treasury, agency debt, and agency MBS markets. Membership includes securities dealers, banks, buy-side firms, market utilities, foreign central banks, and others. Also, representatives of the Federal Reserve Bank of New York and U.S. Department of the Treasury serve as ex officio members and technical advisors. 14 The Treasury Market Practices Group (TMPG) TMPG Introduced a Dynamic Fails Charge in May 2009 to Incentivize Timely Settlement and Eliminate Strategic Fails Prior to the implementation of the fails charge, a seller of Treasury securities could postpone, without explicit penalty and at an unchanged in voice price, delivery of the securities. During 2009 Treasury fails averaged approximately $14.4 billion per day during the first four months of 2009, but only $4.2 billion per day through September 2010.
1SIFMA members agreed that fails create counterparty, market, other risks and therefore share TMPGs view that every effort should be made to minimize fails, including through the implementation of a fails charge 1SIFMA provided a number of constructive considerations related to its design and implementation Fails Charge Rate Data Review Review of Penalty Rate Supply Dynamics Incentive Effects of Fails Charge Need to Ensure Broad Participation Resolution Period Implementation 15 TMPG Fails Charge Proposal and Implementation
The fails charge applies to U.S. Treasury Securities; all agency debt instruments issued by Fannie Mae, Freddie Mac and the federal Home Loan Banks and agency pass-through MBS issued by or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. The TMPG recommendation does not apply to collateralized mortgage obligations or other structured mortgage securities. The fails charge is recommended for all delivery-versus-payment settlement obligations in the applicable security types. For Treasury and agency debt securities, the fails charge is 3%. For agency MBS, the recommended fails charge is 2%. Also, TMPG recommends a two-day resolution period for fails in the agency MBS market. 16 The Agency Debt and Agency MBS Fails Charge were Implemented on February 1 st
17 Source: New York Fed TMPG Fails Charge Outlook Fails have decreased since implementation, though there has been an increase in recent months.
TRACE Dissemination 18
FINRA TRACE Dissemination 1FINRA recently proposed rules for the real-time dissemination of trade information TBA Proposal MBS Spec Pool Proposal 2FINRA requested comments regarding the general appropriateness of dissemination practices 19 SIFMA is generally supportive of FINRAs proposal to expand the TRACE Rules, noting that improving the transparency of structured finance products and markets are a necessary component of broad-based economic recovery.
FINRA TRACE Dissemination 1Liquidity Concerns The TBA market is an institutional market, markets participants are attracted to the liquidity and the ability it creates for them to transact quickly. 2Markets Are Not One Size Fits All The markets for TBAs, Specified Pools, 144A Transactions, etc… are unique and may require different approaches in terms of rule proposals. 3Operational Concerns Firms need adequate time make the necessary changes to internal systems and procedures. Staffing needs and time to test systems must be considered. 20
Good Delivery Guidelines 21
Participants in the TBA market generally adhere to market-practice standards commonly referred to as the Good-Delivery Guidelines. The Guidelines are a chapter in SIFMAs Uniform Practices Manual*, which was first published in The Uniform Practices Manual contains an extensive set of market practices related to the trading and settlement of mortgage and asset backed securities, covering both operational and market issues. The Manual is maintained by SIFMA staff at the direction of its member committees. It is a living document, revised, clarified, and amended on an as-needed basis, with the careful consideration of market participants. The Good Delivery Guidelines cover a number of areas surrounding the TBA trading of agency MBS, including certain aspects of the nature of the collateral backing and the structure of the MBS eligible for the TBA market, as well as standardization of various mechanics of TBA trading. Many of the sections of the Good-Delivery Guidelines are operational in nature, dealing with issues such as the number of bonds that may be delivered per one million dollars of a trade, the allowable variance of the delivery amount from the notional amount of the trade, and other similar details. *Uniform Practices For the Clearance and Settlement of Mortgage-Backed Securities and Other Related Securities, available here: 22 How is the TBA market governed? (A.K.A What are the Good Delivery Guidelines?)
Good Delivery Guidelines - Update Good Delivery Guidelines – Recent Updates and Revisions Single Price for CPR Claims Explicit 30 Day Payment Deadline Aggregation of Claims Shorter Retransmittal Period Good Delivery Eligibility for Pools with Original Face Greater than 50mm 23
1Rule making requires a balanced approach. 2Participants in the mortgage market are wide and varied as are the product themselves. Market input is needed and necessary throughout the rule making process. 3The mortgage market is enormous. The home mortgage market is approximately equal in size to bank balance sheets. Securitization and the GSEs finance nearly 70% of home mortgages. All decisions which impact the mortgage market must be carefully considered. 4The implementation of the TMPG fails charge is a model that can be learned from and improved upon. 5The restoration of activity in securitization markets depends on the confidence of investors to invest in mortgage products. Regulation in these markets should be developed with the end goal of improving and strengthening the housing finance market. 24 Key Points