Independent Banker - January 2019 - 33

Next: Two regulatory relief proposals to push for
flow from the start is to buy " seasoned " pools. Generally,
an MBS that came to market 24 to 36 months ago is considered
seasoned, and especially if the original term was
15 years or less. A pool with 12 years remaining will have
22 percent more principal returned in the first year than
a new 15-year pool, guaranteed. That's the magic of the
amortization schedule.
One can also buy above-market (read: " premium " ) coupons.
As of this writing, a new 15-year mortgage loan comes
at about 4.25 percent. A mortgage security that has a net
So if your objective is to
lock up your investments
for a while and limit the
reinvestment risk, ask your
broker for some high-loanto-value
offerings.
coupon ( " pass-through " ) of 4.00 percent or higher means
the homeowners are still paying an above-market rate and
therefore have some incentive to refinance. The offering
sheets from your broker should document how much faster
these premium pools should run versus generics.
Size can matter ...
There are also pools that are collateralized by jumbo mortgages,
which mean the original individual loans were
greater than $485,350 if originated in 2019. (The limit is
higher in certain states and territories.)
Usually, jumbo pools prepay faster than conforming
loans, because borrowers see a greater absolute dollar
benefit from refinancing. There's also a school of thought
that jumbo borrowers are more affluent and therefore
more mobile.
Don't forget to look at the number of loans in a pool. An
MBS with 4,000 loans will prepay much more consistently
than one with 40, and it will likely have more resale liquidity.
The minimum size of a single pool is only $1 million,
and there is no minimum loan count.
... as can LTVs
You may recall in the depths of the Great Recession that
the federal government launched a dizzying array of assistance
programs, some of which were directly focused on
keeping at-risk mortgagors in their homes. These went by
an alphabet soup of terms like HAMP, HARP and MHA.
The upshot is that there are mortgage securities out there
in the secondary market backed by loans that are still well
over 100 percent loan to value.
The securities backed by these high-LTV loans have
never prepaid as fast as conventionals, since the borrowers
have had little or no equity. Now that mortgage rates are
at their highest levels since these programs were launched,
there's even less reason for the homeowners to refinance.
So if your objective is to lock up your investments for a
while and limit the reinvestment risk, ask your broker for
some high-LTV offerings.
To put a wrap on this column, all mortgage securities
cost significantly less than they have for years. This
has cut down on the premium risk, but the ability to buy
" off the run " MBS to your community bank's benefit still
exists. Add to that the community bank industry's general
shortage of available liquidity, and MBS' cash flow characteristics
make them a natural complement. My advice is to
investigate some nuances and perhaps demonstrate that
you're smarter than the average investor.
Education on Tap
Learn balance sheet management
ICBA Securities and Vining Sparks will present
the 2019 Balance Sheet Academy April 29-30
in Memphis, Tenn. This intermediate-level class
offers a range of topics to improve community
bank performance, and up to 18 hours of CPE. To
register, visit icbasecurities.com
Community Banking LIVE
ICBA Securities will again be
prominently featured as part of
ICBA Community Banking LIVE
2019, March 18-22 in Nashville,
Tenn. Its representatives will
present multiple workshops
during the week, on a variety of
balance sheet topics. See icba.org/convention
for more details.
independentbanker.org Q 33
http://www.icbasecurities.com http://www.icba.org/convention http://www.independentbanker.org
Independent Banker - January 2019

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