In today's market, having a true understanding of your organization's mortgage loan portfolio can be one of the keys to weathering the current turmoil. It is important to understand the full contents of your investments, along with the associated interest and credit rate risks; as well as to be able to determine the eligibility for, and profitability of, mortgage loan sales and associated liquidity.
In the first 6-months of 2009, credit unions sold 50 percent more 1st mortgage loans than they did in all of 2008. Callahan’s First Look project puts the total dollar amount just north of $31.2 billion, compared to under $10 billion at mid-year 2008 and under $20 billion at year-end 2008. The highest total year sales on the secondary occurred in 2003 with $37.7 billion.
*2Q data is from Callahan's First Look Project which has data on credit unions representing 95% of industry assets.
Fannie Mae offers a free loan portfolio analysis service to credit unions holding mortgages on the balance sheet. The steps in this portfolio review can ultimately provide you with the information you need to make decisions.
Data Integrity Analysis
The first step in understanding your portfolio is to conduct a thorough analysis beginning with your data. Many loans held in portfolio have incomplete data elements. For example, many servicing systems do not differentiate cash-out refinance loans from rate/term-refinance loans. Often the occupancy and the number-of-units fields are coded incorrectly. Sometimes loans are not amortizing correctly. There are a number of issues that can be identified and corrected at this early stage of the analysis.
When preparing data for a portfolio review, Fannie Mae will request a new FICO score. This updated score will help determine the eligibility of the loan for sale or securitization. Credit union members whose loans are included in the analysis will not have a credit inquiry posted to their credit reports when Fannie Mae pulls the updated FICO score.
We recalculate the estimated current value of each property using Fannie Mae's new, proprietary Mark-to-Market LTV (MTM-LTV) model. The MTM-LTV model is used to determine the eligibility of loans held in portfolio for sale or securitization and when assigning a dollar value to the loan. Portfolio managers also find this information very useful in assessing (or "evaluating") the amount of equity that members have in their homes.
Ineligible Loan Summary
Fannie Mae can quickly determine which loans are eligible for sale to or securitization with Fannie Mae under current guidelines. Unfortunately, this step is ignored often in the market place and can delay the portfolio management process. This summary provides you with detailed information on your portfolio – information that many financial institutions do not have – including the reason(s) why a loan is ineligible. In some cases, the issue may be as simple as a minor data error; in other cases, this report could alert you to areas of credit risk and collateral exposure.
Indicative Price Stratification
This is one of the most valuable aspects of a portfolio review and provides CFOs with a spreadsheet that can provide answers to the common question, "How much can I sell at what price?"
The stratification process begins by grouping the loans in your portfolio into mortgage-backed securities (MBS)-like categories, then benchmarking those against the MBS market. This pricing analysis also takes into consideration the unique credit, collateral, seasoning, and performance characteristics of your portfolio.
Loans can be isolated and grouped to determine their value based on benchmarks and other indicators. Additionally, this report can be used to target specific transactions that meet your balance sheet and income statement needs.
There are two main executions that Fannie Mae offers for seasoned loans through our Investor Channel: a whole loan sale and a swap transaction. Both transactions offer liquidity to credit unions.
A seasoned whole loan sale results in cash proceeds, similar to what happens when you sell loans through eCommitting. Commitments are transacted via a recorded phone call with our Capital Market Sales Desk. These cash transaction are a great source of mortgage funds for your members and source of liquidity for your institution.
A swap results in the issuance of a Fannie Mae MBS into the account in which you normally hold securities. This MBS is backed by your loans and your loans only. Under the swap transaction, you have the option to hold the security in portfolio like you would any other security or sell that security in the open market for cash proceeds. By holding an MBS instead of whole loans, you can reduce your capital and reserve requirements and increase your borrowing capacity. The impact of securitization is broad; we can discuss generalities with you, but please consult with your accountants for the specific impact to your organization.
If you are seeking assistance with management of loans held on your balance sheet that may have been originated for investment performance, Fannie Mae's Investor Channel can help. This team specializes in loans that are seasoned and have a performance history.
The first step to getting a better understanding of your mortgages held in portfolio is simple—all you have to do is contact a Fannie Mae Investor Channel representative. We will gladly share report examples and data requirements with you. For credit unions east of the Ohio-Mississippi, please contact Michael Matz at (202-752-3324). If your credit union is west of the Ohio-Mississippi, please contact Ralph Bonner at (312-368-6228).