Fannie Mae's recent announcements on its planned buyouts created considerable uncertainty around the timeline of when these buyouts will happen and where rolls ultimately should be priced, Barclays Capital analysts said.
Since its initial buyout announcement on Feb. 10, market volatility in rolls as well as higher coupons has been quite high, the analysts said.
Yesterday, the GSE released its fourth announcement on these buyouts. The announcement made yesterday finally clarified, according to Barclays analysts, the timeline in which delinquent loans will be repurchased out of pools. Additionally, these changes offer considerable clarity on where rolls should trade. The analysts, in a report released after the announcement, listed their key takeaways.
They said that much as they had expected, the agency intends to proceed by purchasing out loans on a coupon-by-coupon basis. This rule applies to all products, including 10/20s, ARMs, etc. This would begin with the highest coupons in the April report, and then proceeding to lower coupons in subsequent reports.
The firm has also said that it will repurchase 220,000 loans in the April report. This effectively removes almost all the delinquent loans from 6.5s and higher coupons. By the May prepayment report, Fannie Mae intends to take out the delinquent loans from 6%, and then in the June report, 5s and 5.5s.
According to Barclays Capital analysts, market fears that servicer guideline changes in terms of the removal of HAMP trial modifications could result in a surge in HAMP-related buyouts seem to be unfounded.
Based on the numbers reported on the Fannie Mae statement, analysts said that the incremental rise in HAMP-related buyouts resulting from this servicing change appears to be moderate, at best, perhaps an increase of 20,000 to 30,000 loans.
The market seems to have been expecting as many as 200,000 HAMP modifications to be repurchased in the April report, which is proportionally distributed across coupons.
The announcement, Barclays analysts said yesterday,implied that rolls will reprice sharply on Friday morning. They expected the April/May 6.5 roll to go from negative 13.5 ticks to around nine ticks, and the six roll to go from negative seven ticks to negative 15 ticks.
In the May/June roll, analysts anticipate both the 5.5 and 5 rolls to come under pressure and settle at negative one tick and six ticks, respectively.
Another implication of yesterday's announcement is that the Gold FHLMC/FNMA 6.5 swap should collapse as FNMA 6.5s for April settle should be clean bonds.
Accordingly, analysts suggested shorting the Gold FHLMC/FNMA 6.5 swap, and put on the trade in the firm's convexity portfolio.
This is exact timeline that Fannie Mae outlined yesterday:
On Feb. 10, Fannie Mae announced that it intends to considerably increase its purchases of loans from single-family MBS trusts that are delinquent as to four or more consecutive monthly payments. The firm offered added information about its selection criteria for buying these delinquent loans on March 1.
In response to market inquiries and in the interest of further transparency, Fannie Mae announced yesterday that it is providing more information regarding its single-family delinquent loan purchases.
In March 2010, it intends to buy all loans that it is required to purchase pursuant to its trust documents, the GSE said. It is also going to buy close to all of the loans that are delinquent as to four or more consecutive monthly payments and back MBS with passthrough rates of 6.5% or greater.
The loans that the agency is required to purchase pursuant to its trust documents include loans like those that are 24 months delinquent as well as those that are ready for permanent modification under the GSE's loss mitigation strategies, such as those ready for modification under the Home Affordable Modification Program (HAMP).
The March purchases will be reflected in the MBS pool factors to be released on the fourth business day of April 2010. The agency expects the aggregate number of delinquent loans bought, both mandatory and optional, from MBS pools in March 2010 to be around 220,000.
In April 2010, Fannie Mae intends to buy all loans that it is required to purchase pursuant to its trust documents. It will also purchase close to all of the loans that are delinquent as to four or more consecutive monthly payments and back MBS with passthrough rates of 6.0% or greater. All April 2010 purchases will be reflected in the MBS pool factors to be released on the fourth business day of May.
Fannie Mae also intends to buy all loans that it is required to purchase pursuant to its trust documents, as well as nearly all of the loans that are delinquent as to four or more consecutive monthly payments and back MBS with passthrough rates of 5.0% or greater. All May 2010 purchases will be reflected in the MBS pool factors that will be released on the fourth business day of June.
As a result of the above method, in each specified month through May 2010 Fannie Mae will buy those loans in the designated passthrough rate category that are delinquent with respect to four or more consecutive monthly payments as well as those loans in a passthrough rate category designated for a prior month that became delinquent for four consecutive monthly payments.
In June 2010, the GSE plans to buy loans in a passthrough rate category designated for a previous month (5% or more) that become delinquent with respect to four consecutive monthly payments and to purchase close to all loans that are delinquent with respect to four or more consecutive monthly payments for all other passthrough rate categories (below 5%). These purchases will be reflected in the MBS pool factors to be released on the fourth business day of July.
After June 2010, the GSE intends to buy close to all loans that become delinquent with respect to four consecutive monthly payments in all pass-through rate categories.
Generally, Fannie Mae said it intends to conduct the voluntary delinquent loan purchases described in yesterday's announcement when it is in its economic interest to do so. But, Fannie Mae's ability to implement the purchases will be subject to economic, market, operational, and regulatory constraints. The purchases described in this announcement will occur for close to all single-family MBS prefixes.