Transcript SIFMA PowerPoint Template

BDUG Annual Meeting
JOSEPH COX
MANAGER, SECURITIZATION
OCTOBER 25, 2012
Overview
1
Introduction
2
Market Overview
3
TMPG Fails Charge
4
FINRA TRACE Dissemination
5
Uniform Practices Manual
2
Who is SIFMA?
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
3
What is the To-Be-Announced Market and Why is it Important?
 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.
4
How are MBS Created?
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.
Mortgage
Borrower A
Bank A
$
Mortgage
Trust
Mortgage
2
Borrower B
Mortgage
MBS
2
$
Investor
Mortgage
Mortgage
1
$$$
1
3
3
$$$
Borrower C
$
5
US Housing Overview
6
How the Securitized Mortgage Market Compares to the Rest of the U.S.
Bond Market
U.S. Bond Market Average Daily Trading Volume
2011
Outstanding U.S. Bond Market Debt
2011
600.0
12,000.0
$ Billions
$ Billions
500.0
10,000.0
8,000.0
400.0
6,000.0
300.0
4,000.0
200.0
2,000.0
100.0
0.0
Treasury
Mortgage
Related
Corporate
Debt
Municipal
Money
Markets
Federal Asset-Backed
Agency
Securities
Sources: Treasury, Federal Reserve, Federal agencies, Dealogic, Thomson Reuters,
Bloomberg, Loan Performance and SIFMA
0.0
Treasury
Agency MBS
Federal Agency
Securities
Corporate Debt
Municipal
Sources: FRBNY, MSRB, FINRA
 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.
7
The U.S. Mortgage Market and the Importance of Securitization
Mortgage Market and Bank Balance Sheets Comparison
2010
18,000.0
$ Billions
16,000.0
14,000.0
12,000.0
10,000.0
8,000.0
6,000.0
4,000.0
2,000.0
2006
Source: Federal Reserve
2007
2008
2009
Mortgage Debt Outstanding
2010
Assets on Bank Balance Sheets
 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 nation’s housing stock.
8
What is the Breakdown of the Mortgage Market?
Composition of Mortgages in the United States 2010
Commercial
17%
Multifamily
6%
Farm
1%
Home
76%
Source: Federal Reserve
 There were $13.8 trillion mortgages outstanding in the United States at the end of 2010.
 76% of these are home mortgages ($10.5 trillion).
9
Funding the U.S. Mortgage Market: Two Perspectives
Residential Mortgage Debt Funding Sources
Holders of Home Mortgages in the United States 2010
GSE Portfolio,
$300.0
Finance
Companies
3%
Raw Loans
(Not
Securitized)
$3,415.6
Agency MBS
$5,517.1
Non-Agency
RMBS (plus
home equity),
$1,313.9
REITs
0%
Pension and
Retirement
Funds
0%
Banking System
28%
Federal and
state
governments
1%
Households
1%
Businesses
0%
Securitized/GSEs
67%
Insurance
0%
Source: Federal Reserve
 67% ($7.1 trillion) of home mortgages are held in a GSE portfolio or securitized (agency and nonagency).
 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.
10
Who Holds Agency MBS?
Holders of Agency MBS
Total: ~$5.5 trillion
REITs Insurance and
2%
Pension
9%
Mutual
Funds
11%
US Bank Holding
Companies
25%
Savings Institutions
3%
Foreign Holdings
14%
Fannie Mae
5%
Freddie Mac
6%
Federal Reserve
20%
FHLB
2%
US Treasury
3%
Sources: Federal Reserve,
Treasury, WSJ, SIFMA
 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.
11
U.S Mortgage Market In a Global Context - Size
Outstanding Mortgage Debt (In Euros, 2010)
U.S.A
United Kingdom
Germany
France
Spain
Netherlands
Italy
Sweden
Denmark
Norway
Belgium
Ireland
Portugal
Greece
Austria
Finland
Poland
Turkey
Russia
Hungary
Luxembourg
Czech Republic
Cyprus
Slovakia
Ukraine
Romania
Latvia
Lituania
Estonia
Slovenia
Bulgaria
8,383,789
1,442,685
1,152,195
796,600
680,208
629,153
352,012
283,666
237,313
219,382
163,369
135,806
114,553
80,507
80,000
76,244
67,669
30,560
29,952
24,853
18,591
18,557
12,033
10,863
8,778
6,769
6,498
5,988
5,971
4,837
4,453
0
1,000,000
2,000,000
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.
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
Source: Hypo.org
12
TMPG Fails Charge
13
The Treasury Market Practices Group (TMPG)
•
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.
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.
14
TMPG Fails Charge Proposal and Implementation
1
SIFMA members agreed that fails create counterparty, market, other risks and therefore share
TMPG’s view that every effort should be made to minimize fails, including through the
implementation of a fails charge
1
SIFMA 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
The Agency Debt and Agency MBS Fails Charge were Implemented on
February 1st
•
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
TMPG Fails Charge Outlook
Fails have decreased since implementation, though there has been an increase in recent months.
MBS Fails - 4 Week Average
Feb 2011 - Oct 2012
$800,000
$ Millions
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
MBS Fail to Receive
MBS Fail to Deliver
9/23/2012
8/23/2012
7/23/2012
6/23/2012
5/23/2012
4/23/2012
3/23/2012
2/23/2012
1/23/2012
12/23/2011
11/23/2011
10/23/2011
9/23/2011
8/23/2011
7/23/2011
6/23/2011
5/23/2011
4/23/2011
3/23/2011
2/23/2011
$-
Source: New York Fed
17
TRACE Dissemination
18
FINRA TRACE Dissemination
1
2
FINRA recently proposed rules for the real-time dissemination of trade information
•
TBA Proposal
•
MBS Spec Pool Proposal
FINRA requested comments regarding the general appropriateness of dissemination practices
SIFMA is generally supportive of FINRA’s 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.
19
FINRA TRACE Dissemination
1
Liquidity 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.
2
Markets 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.
3
Operational 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
How is the TBA market governed? (A.K.A What are the Good
Delivery Guidelines?)
•
•
•
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 SIFMA’s Uniform Practices Manual*, which was first published
in 1981. 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: http://www.sifma.org/bookstore/
22
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
Key Points
1
Rule making requires a balanced approach.
2
Participants in the mortgage market are wide and varied as are the product themselves. Market
input is needed and necessary throughout the rule making process.
3
The 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.
4
The implementation of the TMPG fails charge is a model that can be learned from and improved
upon.
5
The 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