Enact Holdings, Inc. · NASDAQ:ACT
Enact — Investor Presentation (January 2019)
54 slides from Enact's investor presentation, January 2019
Slide 1: Understanding the Secondary Market
Understanding the Secondary Market Basic Review January 2019 Genworth Mortgage Insurance Corporation ©2018 Genworth Financial, Inc. All rights reserved.
Slide 2: Secondary Market 101 Outline
Secondary Market 101 Outline – Credit – The Markets – Money Market Risk – Mortgage Loan Cycle – What is the Secondary Market? – Functions of the Secondary Market – Main Players in the Market – Size of the Secondary Market – Share of the Secondary Market – Mortgage Origination Income Secondary Market
Slide 3: The Market
The Market The real estate mortgage market actually consists of two separate sections: the Primary Market and the Secondary Market. The Primary Market is where loans are originated; mortgage lenders and banks loan money to borrowers for the purpose of financing real estate transactions. Thes
Slide 4: Money Markets
Money Markets Short-Term Credit Long-Term Credit Federal Funds Mortgages Discount Window Treasury Bonds Certificates of Deposit Municipal Bonds Treasury Bills Corporate Bonds Commercial Paper Corporate Stock Secondary Market 4
Slide 5: Expected Return and Difficult Risk
Expected Return Investment- Grade Junk High Corporate Bonds Bonds ● Privately ● Issued MBS Preferred Stock GSE ● MBS Asset-Backed Money- ● Securities Market GSE Securities Debt ● ● T-bills Low Difficult Risk High Secondary Market 5
Slide 6: Basic Mortgage Loan Cycle
Basic Mortgage Loan Cycle Portfolio Loan Consumer Originator Sells To Secondary Market • Aggregator • GSE/Ginnie Mae • Private Label Secondary Market 6
Slide 7: Originators Of Mortgage Loans
Originators Of Mortgage Loans Types of Originators – Mortgage Bankers ▪ Originate mortgage loans ▪ May originate both Retail and Wholesale ▪ Close loans in their name with borrowed funds from a warehouse line ▪ They may not have a savings base to lend from ▪ Rely on quick turnover of funds from
Slide 8: Originators of Mortgage Loans
Originators of Mortgage Loans Types of Originators – Mortgage Brokers ▪ Originate loan applications and collect documentation from the applicant ▪ Loans are underwritten, closed and funded by a Bank or Mortgage Banker ▪ Can never service a loan ▪ Make simple fee income ▪ Brokers’ share of overal
Slide 9: Originators of Mortgage Loans
Originators of Mortgage Loans Types of Originators – Correspondent Lenders ▪ Deliver closed loans to Mortgage Bankers or Investment Bankers – Banks ▪ Depository institutions that take deposits and lend money out ▪ Hold loans in portfolio or sell on the secondary market ▪ When business cycle is d
Slide 10: Mortgage Industry Specialties
Mortgage Industry Specialties Originators • Find Borrowers • Write Loans • Nationwide • Mortgage Bankers • Mortgage Brokers • Savings and Loans/Thrifts • Correspondent Lenders • Banks • Wholesalers • Credit Unions Investors Servicers • Purchase Existing Loans From Originators • Manage Collection of
Slide 11: Mortgage Origination Income
Mortgage Origination Income Fee Income – Origination fees – Points – Processing and Underwriting fees Cross Selling – Additional consumer loans – Financial products – Deposit accounts Rate Differentials – Spread is earned over time when a loan is held in portfolio – YSP is the amount ove
Slide 12: Mortgage Origination Income (continued)
Mortgage Origination Income (continued) Servicing Income - Largest source of income in the industry – Servicing Retained - Servicer usually retains a portion of the interest and any late fees charged – Servicing Released - Relinquishes the rights to service the loan and receives an up-front fee.
Slide 13: Mortgage Loan Flow
Mortgage Loan Flow Post Secondary Originating Processing Underwriting Closing Servicing Closing Marketing Loan Officer Loan Processor Underwriter Lender Lender Lender Servicer • Markets Lender’s • Collects Additional • Evaluates Risk • Loan Request • Reviews • Sells Loan to • Collects Loan Products
Slide 14: Risk Allocation As Per Loan Placement
Risk Allocation As Per Loan Placement Portfolio FHLB GSE Aggregator Portfolio FHLB GSE Aggregator Interest Rate Risk Bank FHLB & *Bank GSE Aggregator Credit Default Risk Bank Bank **Originating **Originating Underwriting/ Entity Entity Misrepresentation Risk *With certain FHLB programs the originati
Slide 15: Do You Want To Increase Mortgage Production Or Reallocate Your Risk?
Do You Want To Increase Mortgage Production Or Reallocate Your Risk? • Economy ‒National ‒Local • Rate Environment • Loan Product Environment • Purchase or Refinance Market • Staffing • Accounting and Regulatory Issues • Technology Capabilities • Internal Budget Secondary Market 15
Slide 16: Loan Placement Options
Loan Placement Options • Create different options for best execution • Become an Approved Seller/Servicer • Become an Approved Correspondent Lender • Become an Approved Mortgage Broker Secondary Market 16
Slide 17: What Is The Secondary Market?
What Is The Secondary Market? It is an informal market where lenders and investors buy and sell existing loans as whole loans, participations, and mortgage-backed securities. – Whole Loans - The purchase of an entire loan, as opposed to the purchase or sale of a participation or share in a loan.
Slide 18: Functions Of The Secondary Market
Functions Of The Secondary Market • Allows Lenders to generate money to create mortgage loans • Sale of loans on the secondary market allows lenders to transfer portions of risk to the investor • Typically, there are two types of risk: ‒Risk of loss due to borrower default ‒Risk of loss due to inter
Slide 19: Players In The Secondary Market
“Players” In The Secondary Market The Players or Investors in the secondary mortgage market are typically divided into two categories: – The Organized Market – The Private Market Organized Market = Government Private Market = “Unorganized” Secondary Market 19
Slide 20: Players - Government
Players - Government Government Sponsored Enterprises (GSEs) – Federal National Mortgage Association (Fannie Mae) ▪ Federally-chartered, publicly-owned corporation ▪ Provides secondary-market outlet for conventional loans ▪ Largest single purchaser/owner of loans – Federal Home Loan Mortgage Cor
Slide 21: Players - Government
Players - Government GSE Basics After a homeowner has borrowed money to buy a home, the original lender likely resold that loan to Fannie or Freddie. The GSE in turn collected some of those mortgages in a pool, which was sold in the form of mortgage- backed securities (MBS) to private investors,
Slide 22: Secondary Market
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Slide 23: Players - Government
Players - Government Government Sponsored Enterprises (GSEs) – Federal Home Loan Banks (FHLBs) ▪ Federally-chartered but owned by member banks ▪ Also provides secondary-market outlet of conventional loans ▪ Smallest GSE Organized Market = Government Secondary Market 23
Slide 24: Players - Government
Players - Government Government Owned Enterprise – Government National Mortgage Association (Ginnie Mae) ▪ Provides secondary-market outlet for Federal Housing Authority (FHA) and Veterans Authority (VA) loans ▪ Federally chartered and owned corporation Organized Market = Government Secondary Market
Slide 25: Players - Private
Players - Private Private Investors – Investment Bankers – Large Financial Institutions – Pension Funds – Life Insurance Companies – State Housing Agencies (HFAs) Private Market = “Unorganized” Secondary Market 25
Slide 26: Mortgage Origination Market - Rates
Mortgage Origination Market - Rates Interest Rate • Price paid by a borrower for the use of funds for a specified period of time Interest Rate Determinants • Supply of Funds • Demand for Funds • Inflation • Risk (Default, Prepayment, Liquidity) • Taxes Secondary Market 26
Slide 27: Jumbo and Conventional Mortgage Rates
Jumbo And Conventional 30 Year Mortgage Rates Conv. vs. Jumbo Effective Mortgage Rates 4.8 4.6 4.4 Interest Rate (%) 4.2 4.0 3.8 3.6 3.4 3.2 3.0 A M J J A S O N D 16 F M A M J J A S O N D 17 F M 30-year Conventional 30-year Jumbo Source: Mortgage Narrow Bankers Association Spread Between Jumbo and C
Slide 28: Mortgage Originations - FHA/VA Space
Mortgage Originations … FHA/VA Space Originations Shift… …Driving Higher GSE Share of MBS FHA/VA % of Total Mortgage Originations GNMA % of MBS 30.0% 40% 35% 25.0% 30% 20.0% 25% 15.0% 20% 15% 10.0% 10% 5.0% 5% 0.0% 0% 1Q11 2Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 3Q13 4Q13 2Q14 3Q14 1Q15 2Q15 4Q15 1Q16 2Q
Slide 29: Impact Of Interest Rate Movement
Impact Of Interest Rate Movement On Closed Loans – Rates up, value goes down – Rates down, value goes up On Rate Locks – Same effects as above on the underlying instrument, but with an additional dynamic: • As rates go down, close less loans • As rates rise, close more loans On Servicing
Slide 30: Mortgage Originations
Mortgage Originations Quarterly % of Mortgage Originations 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Govt 57 69 76 75 83 117 116 100 99 134 160 152 GSE 152 193 215 207 244 272 248 203 200 277 318 322 Non-ConfJumbo 44 59 65 67 72 93 85 78 77 103 101 100 Subprime 1 1 1 1 1 2 2 1 1 2
Slide 31: Reasons For Issuing Mortgage-Backed Securities
Reasons For Issuing Mortgage-Backed Securities There are many reasons for mortgage originators to finance their activities by issuing mortgage-backed securities. Mortgage-backed securities: 1. Transform relatively illiquid, individual financial assets into liquid and tradeable capital market instrum
Slide 32: Basic MBS Cash Flow
Basic MBS Cash Flow Homeowners make monthly Homeowners Monthly P&I at payments of principal and interest at the mortgage rate. $ the mortgage rate (e.g. 6.5%) The servicer retains a portion of the interest component of Servicer each monthly payment as the Monthly P&I at "servicing fee.“ $ the pass-t
Slide 33: Why an MBS
Why an MBS When you invest in an MBS, you are buying the rights to receive the value of a bundle of mortgages. That includes the monthly payments and the repayment of the principal. Since it is a security, you can buy just a part of the mortgage. You receive an equivalent portion of the paym
Slide 34: Value
Value A mortgage backed security works the same way as a traditional bond. The rate moves inversely to the price. – A higher rate MBS pays more to the investor • More likely to pay off early through a refinance – A lower rate MBS pays less to the investor • More likely to be held all the way to
Slide 35: Quarterly MBS
Quarterly MBS ($MM) GNMA FHLMC FNMA Non-Agency $250,000 $200,000 $150,000 $100,000 $50,000 $0 2Q11 3Q11 4Q11 1Q12 3Q12 4Q12 2Q13 3Q13 4Q13 1Q14 3Q14 4Q14 2Q15 3Q15 4Q15 1Q16 3Q16 4Q16 1Q11 2Q12 1Q13 2Q14 1Q15 2Q16 Source: Inside MBS & ABS Secondary Market 35
Slide 36: Ginnie Mae MBS
Ginnie Mae MBS • Guarantees securities that are issued by banks and mortgage banks that participate in Ginnie Mae programs • HUD • Consists of FHA (federally insured) loans and VA (federally guaranteed) loans • Government full faith and credit guarantee • GN l: All loans have same interest rate • GN
Slide 37: Fannie Mae and Freddie Mac MBS
Fannie Mae and Freddie Mac MBS • Government conservatorship, federally chartered • Directly issue MBS • Accept conventional mortgage loans (Conforming and Jumbo Conforming) • Guarantees its own MBS against credit losses on the underlying loans • Loan Interest Rates historically in 1.75% band Seconda
Slide 38: Private-Label MBS
Private-Label MBS • Issued by private companies • No GSE guarantee • Rated securities with subordination or other credit support ‒ Subordinate tranches absorb losses before senior tranches ‒ Mortgage loan credit quality ▪ Collateral - LTV ▪ Credit - FICO ▪ Capacity - DTI • Jumbo Loans • Alt-A: Loans
Slide 39: Fannie Mae
Fannie Mae Secondary Market 39
Slide 40: CDO Tranche Structure
Step #1 Originate AAA First claim to Step #2 Pool cash flow from P&I payments Pool of Mortgages Step #3 CDO’s AA Next claim… Tranche A Next claim… BBB BB Secondary Market 40
Slide 41: Different Risk and Return for Different Investors
Different Risk and Return for Different Investors = expected Last Loss Yield | First Loss Highest Higher Risk Expected Yield i RRRRT TERED Secondary Market a1 G enwort h 3 1: 4,
Slide 42: CMOs And REMICs
CMOs And REMICs • Time tranching of cash flows • Underlying assets can be GSE MBS, whole mortgage loans, or other Real Estate Mortgage Investment Conduit (REMIC) securities • GSEs issue Collateralized Mortgage Obligations (CMOs) and REMICs • Private MBS issuers typically structure all their deals as
Slide 43: Credit Default Swaps (CDS)
Credit Default Swaps (CDS) • Credit Default Swaps are contracts that insure against default of municipal bonds, corporate debt, and MBSs • Banks, insurance companies, and hedge funds all sell them. A premium is collected for providing the insurance. Secondary Market 43
Slide 44: Mark to Market
Mark to Market In accounting and finance, mark to market is the act of assigning a value to a position held in a financial instrument based on the current market price for that instrument or similar instruments. For example, the final value of a futures contract that expires in 9 months will not be
Slide 45: FASB 157
FASB 157 A Federal Accounting Standards Board (FASB) Statement that requires all publicly-traded companies in the U.S. to classify their assets based on the certainty with which fair values can be calculated. This statement created three asset categories: Level 1, Level 2 and Level 3. Level 1 assets
Slide 46: Detailed Mortgage Loan Cycle
Detailed Mortgage Loan Cycle Retains whole loans Directly Who sells Through securities Guaranteed dealers or FNMA To Fannie Mae MBS’s trading desk Which sells Through securities Sells whole loans Participation Cert’s dealers or FHLMC or participations To Freddie Mac trading desk Mortgage Lender Who
Slide 47: Genworth Underwriting Guidelines
Genworth Underwriting Guidelines Secondary Market 47
Slide 48: Genworth Rate Express
Genworth Rate Express® Secondary Market 48
Slide 49: LOS Connections
LOS Connections Secondary Market 49
Slide 50: Training Tools and Information
Training Tools and Information Secondary Market 50
Slide 51: Training Tools and Information
Training Tools and Information Secondary Market 51
Slide 52: Additional MI Site Information
Additional MI Site Information Secondary Market 52
Slide 53: Your Genworth Resources
Your Genworth Resources ➢ ActionCenter®: 800 444.5664 ➢ Your Local Genworth Regional Underwriter ➢ Your Genworth Sales Representative Secondary Market 53
Slide 54: Legal Disclaimer
Legal Disclaimer Genworth Mortgage Insurance is happy to provide you with these training materials. While we strive for accuracy, we also know that any discussion of laws and their application to particular facts is subject to individual interpretation, change, and other uncertainties. Our train
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