Bob Ives, VP of Retained Portfolio Asset Management for Fannie Mae, spoke with DS News to discuss the GSE’s recent announcement for its pilot sale of reperforming loans and the reasons behind this new category of offerings.
Ives is responsible for the management of loans and securities in the Retained Portfolio and is a key member of the team that developed the Connecticut Avenue SecuritiesTM series of risk-sharing transactions. Prior to his current appointment, Ives was responsible for the trading of all structured mortgage products, including oversight of agency Real Estate Mortgage Investment Conduits, Commercial Mortgage-Backed Securities (CMBS), and municipal assets.
What are the reasons behind selling this pilot offering of reperforming loans?
Fannie Mae has been successful reducing its balance sheet over the last several years, post conservatorship. In particular, we are guided by the Treasury Preferred Stock Purchase Agreement which requires Fannie Mae to reduce its portfolio balance to $250 billion by the end of 2018. Subsequent to the agreement, we received additional guidance from our regulator, the Federal Housing Finance Agency (FHFA) to reduce the portfolio to 90 percent of that balance. As a result, we have been trying to reduce the assets on our balance sheet mostly through sales, and we have been a significant seller in a number of different markets.
Today, the single biggest asset on our balance sheet is reperforming loans. These reperforming loans generally came from the modification of non-performing loans which were purchased first out of MBS. Successful modifications led to loans that are now performing. As we aim to reduce the balance of our retained portfolio, we turned to another important effort that allows us to securitize many of these reperforming loans in to Fannie Mae Agency MBS.
The reality is that we won't be able to securitize all the loans into agency MBS because some of these loans have unique characteristics that don’t fit into MBS execution. The most significant of these is forbearance, where the amount of principal loan isn't forgiven. Rather the borrower does not have to pay interest on a portion of the principal, but the principal balance is due when the loan matures. We are exploring securitization options in the future for some of these loans but there are a lot of complex issues that are involved. Because of this, we decided to have a sale of reperforming loans to help us accomplish a couple of purposes.
What is the ideal outcome in selling these loans?
One of the purposes of this sale is it helps us in our overall goal of reducing the size of our balance sheet. In addition, it will allow us to learn more about the market for reperforming loans and the overall demand, although speaking to investors, we know that the overall demand for reperforming loans is actually fairly high.
In looking toward the future, is this an offering that Fannie Mae hopes to continue?
I think it is likely that we will continue to sell reperforming loans in the future but I am hesitant to describe it as programmatic selling. I expect that we will have a few sales of reperforming loans next year so this could be stated as the first of more sales to come, but they will not necessarily be as large as this sale.