Market Mover - BNP PARIBAS - Investment Services India

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This section is classified as non-objective research(most recent reporting is as of August 2011).Through a combination of run-off and possibly somesales, Fannie has managed throughout the year tosteadily shrink their retained mortgage portfolio, andwe expect that will continue into year-end.Debt Composition Shifts as WellAs shown in Chart 1, as the mortgage portfolio hasdeclined, so has aggregate debt outstanding. Chart 2breaks down the debt portfolio into short term(original maturity < 1 year) debt, and callable andnon-callable long term debt. Noncallable long termdebt is actually growing outright, while both shortterm and callable debt outstanding has sharplydeclined.The drop in callable debt is material, particularlyconsidering the sequence of callable redemptionwaves of the past year given the low rateenvironment. Callable issuance has been highacross all of the GSEs due to the redemptions, butas we’ve noted in prior research and we show inTable 1, the GSEs have been aggressivelyrestructuring their debt portfolios and reducingcallable debt. Fannie’s callable debt outstanding hasdropped by UDS 69bn year-to-date, while their shorttermdebt has climbed by UDS 37bn. Overall theirdebt portfolio has shrunk UDS 52bn and we expectthat trend to continue into year-end, and in-line withthe UDS 81bn required drop in their retained portfolioyear-over-year.As a percentage of their debt outstanding (lastcolumn in Table 1), callables have been reduced by7.4% while noncallable and short term debt hasrisen. Although noncallable debt has grown only 1%this year, it actually jumped from 48% to 53% of totaldebt outstanding YOY in 2010. This is almostcertainly a reflection of the longer duration and lowerconvexity in the mortgage portfolio, which results inless needs to buy vol (issue callables) on the liabilityside.Further prepays of high coupon mortgages will onlyintensify this trend. Going forward, we expect that netcallable issuance from Fannie and Freddie will shrinkmaterially next year, though some of those fundingneeds will shift to bullets and discount notes. Overall,the continued contraction of the portfolio may keepcallable financing levels rich and put pressure onagency debt spreads due to the low supply.Mary-Beth Fisher 27 October 2011Market Mover32www.GlobalMarkets.bnpparibas.com
This section is classified as non-objective researchMBS: HARP 2.0? OMG, INBD!• A change to the nature of reps and warrantrelief offered by FNM does not seem likely. Onlyan improvement in the usage of automatedappraisal is apparently targeted. FRE isexpected to match the rep and warranty reliefoffered by FNM.• There do not appear to be any newagreement or understandings on MI and secondlien issues.• Decreased LLPAs and expanding HARP to125+ LTV borrowers should have a marginalimpact.• Prepay differences between FNM and FREindicate that the effect of HARP enhancementsmay be marginal at best. We expect 2008 FN 6swhich paid at 24 CPR last month, to possiblymove to the 30 CPR area. Final details areawaited and are expected to be available on Nov15 th .• The excessive pickup in September GNII 4%speeds was driven by buyouts rather than refi’s.• FRE’s September summary indicates that itsnegative convexity exposure appears to havedeclined in the rally, as higher coupons arealready beyond their points of maximumnegative convexity.Much ado…When details about enhancements to HARP startedinitially emerging on Monday, it appeared that thechanges were significant and would include a waiverfrom repurchases. It also appeared that second lienand MI issues that have held back HARP refinancingwere being newly addressed as well.But as the day progressed, further clarificationsindicated that changes might in fact be fairlymarginal. Indeed, there does not appear to be anychange as such to the nature of FNM’s requiredrepresentations and warranties. Regulatory agenciesprobably viewed that the existing rep and warrantyrelief was already substantial but that the awarenessaround it wasn’t. Specifically, FNM’s underwritingreps and warranties are not expected to change at allbut the GSE would be more efficiently usingautomated appraisals. FNM’s use of the automatedappraisal is reportedly at 30%, while that of FRE’s at80%. Freddie would begin offering the underwritingrep and warranty relief on current loans that FannieChart 1: Loans and Securities Held by theBanking System$ bnFN/FG Passhroughs $ 857CMOs $ 457US Treasuries $ 163Other Securities $ 1,245Real Estate Loans $ 4,122C&I Loans $ 1,239Loans to individuals $ 1,290Other Loans & leases $ 455Source: FDICChart 2: % MI by Coupon and Vintage – FG 30yLoan LevelCpnVintage2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20114 21% 6% 9% 12% 8% 10% 2% 34% 6% 8% 10%4.5 27% 12% 10% 7% 8% 6% 9% 12% 8% 9% 12%5 26% 16% 17% 19% 11% 8% 10% 17% 11% 8% 11%5.5 23% 17% 19% 21% 13% 12% 18% 28% 10% 11% 15%6 38% 22% 19% 21% 21% 18% 31% 36% 11% 23% 76%Source: BNP ParibasChart 3: % Second Liens by Coupon and Vintage– FG 30y Loan LevelCpnVintage2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20114 0% 0% 4% 14% 23% 17% 11% 2% 16% 15% 16%4.5 10% 4% 16% 14% 12% 19% 18% 18% 16% 16% 16%5 7% 8% 10% 10% 13% 12% 18% 14% 13% 21% 23%5.5 13% 9% 6% 10% 14% 17% 20% 10% 11% 23% 23%6 9% 6% 4% 7% 12% 16% 15% 6% 3% 11% 10%Source: BNP Paribasoffers. The criteria for being current was relaxedsomewhat. Previously, a borrower had to be 12months current for the servicer to obtain anunderwriting rep and warranty relief from FNM; thatnow changes to current over six months with onedelinquency over the past 12 months. Verbalverification of employment for FNM was and shouldcontinue to be the norm, (no change there) andshould be matched by FRE. Of course, this rep andwarranty relief is available only for same servicerrefi's; for refinancing through a different servicer, theborrower is re-qualified, and an entirely new loan withnew reps and warranties is created. There was talkof a fee for rep and warranty waiver, which may bemore applicable to different servicer refinancing. Butif there were underwriting issues with the loan backwhen the economy was doing well, the probability ofthat being corrected now is unlikely (income is acommon issue).Anish Lohokare / Timi Ajibola / Bo Peng 27 October 2011Market Mover33www.GlobalMarkets.bnpparibas.com
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