Sector developments and company hires

LLPA increase ‘misguided’
Fannie Mae and Freddie Mac are increasing the loan-level price adjustment (LLPA) by 50bp as an adverse market delivery charge on effectively all mortgage refinances, except for construction loans, with settlement dates after 1 September. In response to the move, the Mortgage Bankers Association states that the announcement “flies in the face of the Administration's recent executive actions urging federal agencies to take all measures within their authorities to support struggling homeowners”.

The association calculates that the increase means the average consumer will be paying US$1,400 more than they otherwise would have paid for a refinance mortgage. Further, the 1 September effective date means that thousands of borrowers who did not lock in their rates could face unanticipated cost increases days from closing. 

Recent refinance activity has not only helped homeowners lower their monthly payments, but it is also reducing risk to the GSEs and taxpayers, according to the MBA. It notes that at a time when the US Fed is purchasing US$40bn in agency MBS per month to help reduce financing costs for mortgage borrowers to support the broader economy, this action raises those costs and undermines the Federal Reserve's policy.

"We strongly urge FHFA, which had to approve this policy, to withdraw this ill-timed misguided directive," the association concludes.

In other news…

Aurorus upgraded on input error
Moody's has upgraded its ratings by one to two notches on the class B to F notes issued by Aurorus 2020, which priced last month (SCI 24 July), reflecting the correction of an input error in the application of the early amortisation triggers in its cashflow analysis. The agency notes that its initial modeling did not correctly consider certain triggers, such as the PDL trigger, that would lead to higher payments to rated classes of notes in the event of an early amortisation. The rating action also takes into account the notes' spreads and swap rate related to the transaction's fixed-floating interest rate swap, both being meaningfully lower than assumed at the initial provisional rating date.

Forbearance data integrated
RiskSpan has integrated Intex forbearance data into its Edge platform, allowing analysts to forecast bond performance leveraging loan-level data. The combination of Intex collateral data with RiskSpan's modeling and scenario tools allows mutual clients to run portfolio cashflows under a range of scenarios, with the aim of enabling the industry to more accurately analyse loans in forbearance as a result of Covid-19.

MBS price dislocations examined
In a recent Staff Report, the New York Fed examined the economic mechanisms that limited arbitrage between the cash and forward markets of agency MBS, and whether its asset purchases alleviated price dislocations. The analysis found that the cash-forward basis widened significantly - by nine cents per US$100 face value during the height of the Covid-19 crisis. The widening basis was accompanied by a significant increase in selling by customers in the cash market, indicating a “scramble for cash” following the liquidity shock.

At the same time, dealers provided liquidity by increasing both their long cash and short forward positions significantly, but the basis continued to widen - implying that balance sheet costs constrained dealer inventories. The report estimates dealers’ average costs of holding inventory for five weeks at about eight cents, with primary dealers affiliated with banks subject to Basel 3 liquidity regulations appearing to increase their positions more than others.

The basis narrowed by about seven cents following the Fed’s MBS purchases in the forward market. “We attribute this effect to the faster settlement schedules of the Fed’s purchases, compared to the market convention, which allowed a faster deployment of capital. Overall, our results show that the combined liquidity constraints of investors and dealers led to severe price dislocations and the Fed, in its role as the ‘dealer of last resort’, absorbed the liquidity demand that dealers lacked the capacity to meet,” the report notes.

North America
Elementum Advisors has announced significant additions and promotions across its investment and senior leadership teams. Jeff Davis will join Elementum in September as svp, investments. He most recently co-led Aon Securities' credit practice for (re)insurers and advised on capital raises, while also structuring and executing numerous catastrophe bonds.

Meanwhile, after nearly 10 years with Elementum, partner and portfolio manager Paul Barker will join the firm's executive committee as its fourth member, joining the committee's existing members, founding partners Tony Rettino and John DeCaro and managing partner Mike France. Additionally, partner Jake Weber has been charged with leadership of Elementum's newly formed analytics department, which is responsible for evolving the firm's view of risk through dedicated research, as well as providing peer review and support of the firm's transaction modeling efforts.

Note sales boost NPL collections
June collections for Italian non-performing loans were 78% higher than those in May and 6% higher than the pre-Covid average, according to Scope. The agency notes that judicial collections picked up from April’s decline, increasing by 36% in June versus the pre-Covid average. Nevertheless, June performance relied on an exceptional volume of note sales – €30m versus €1m in April - which represented 19% of total volumes, against the historical 10-month average of 10%.

“While judicial and DPO strategies show a lower deviation from their historical average, the share of note sales of total proceeds almost doubled in June, compared to the September 2019 to June 2020 average. Note sales strategies have so far negatively impacted transaction profitability and, since these are typically one-off transactions, the performance improvement could be a temporary boost rather than a stable recovery,” Scope notes.