RMBS Private Label Packaging

Diving into Non-Agency RMBS: The Wild West of Mortgage Investing

For those interested in the nitty-gritty of the mortgage world, non-agency RMBS, also known as private label RMBS, offer a high-risk, high-reward investment opportunity. But before you jump in, it's crucial to understand what you're getting into.

Breaking it Down: Non-Agency vs. Agency RMBS

Most people are familiar with agency RMBS, those backed by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. These offer stability with a government guarantee in case borrowers default.

Non-agency RMBS, on the other hand, are the rebels of the mortgage world. Issued by private institutions like banks and investment firms, they hold mortgages that don't meet the GSEs' strict criteria. This could be due to loan size, borrower creditworthiness, or property type.

The Allure of Non-Agency RMBS

So, why invest in something riskier? The potential payoff:

• Higher Returns: Since they carry more risk, non-agency RMBS can offer significantly higher yields compared to agency counterparts.
• Greater Diversification: Non-agency RMBS can add diversification to your portfolio, as their performance isn't tied to the government.

Understanding the Risks

But with great reward comes great risk. Here's what to watch out for:

• Increased Default Rates: The very reason these mortgages aren't agency-approved is that they carry a higher chance of default.
• Lower Liquidity: The non-agency market is smaller and less transparent, making it harder to buy and sell these securities.
• Complex Analysis: Analyzing non-agency RMBS requires deep dives into the underlying loans, making them unsuitable for casual investors.

Non-Agency RMBS: Not for the Faint of Heart

Investing in non-agency RMBS requires a strong understanding of the mortgage market, risk tolerance for potential defaults, and the ability to analyze complex financial instruments.

Loan types may use Debt Service Ratios, alternative documentation for income, and only want prime locations. If you're a seasoned investor seeking high returns and portfolio diversification, non-agency RMBS could be an option. But for everyone else, proceed with caution and do your research before diving into this wild west of mortgage investing.

It's important to understand that private label non-agency RMBS aren't issued by lenders themselves, but rather by investment banks and financial institutions who pool together mortgages that don't meet agency standards and then issue them as securities.

Here's why lenders aren't directly involved:

• Origination vs. Securitization: Lenders originate mortgages, meaning they connect borrowers with loans. Securitization, on the other hand, is the process of pooling those mortgages and turning them into tradable securities like non-agency RMBS.
• Risk Distribution: By securitizing non-agency mortgages, lenders spread the risk of defaults across investors who purchase the RMBS.

However, if you're interested in which institutions might be originating the underlying mortgages for non-agency RMBS, here are some examples:

• Regional Banks: Many regional banks originate non-jumbo mortgages (loans exceeding conforming loan limits set by Fannie Mae and Freddie Mac) that could end up in non-agency RMBS.
• Mortgage REITs (Real Estate Investment Trusts): These firms invest in real estate-related assets, and non-agency mortgages can be a part of their portfolio.
• Non-Bank Lenders: Specialty lenders who cater to borrowers with lower credit scores or those seeking alternative financing options might originate mortgages that get packaged into non-agency RMBS.

·        Hard Money Loans: Hard money loans, which are short-term, asset-based loans secured by real estate. Typically, eighteen months terms. These loans are for borrowers who might not qualify for traditional bank financing.

·        Non-Agency RMBS: Non-agency RMBS, on the other hand, are securities created by pooling together mortgages that don't meet the standards of government-backed institutions like Fannie Mae and Freddie Mac. These are then sold to investors.

The Difference:

·        Lending vs. Securitization: A hard money company acts as a lender, providing financing directly to borrowers. Non-agency RMBS deal with securitization, which is the process of transforming numerous loans into tradable securities.

·        Loan Focus: Hard money loans are not usually securitized and packaged into non-agency RMBS but sometimes they are bundled together with similar mortgages. Since they do not fit with GSE criteria it is difficult to determine the ability for these loans to perform or rate them.

State Farm Cancelling More Hazard Insurance Policies in CA

 

March 20, 2024
Subject:		Update on California
To:		Agents Licensed in California
From:		Denise Hardin, Senior Vice President

 

Thank you for all that you do to serve State Farm® customers in California. As we’ve discussed in our California Update calls, State Farm General Insurance Company’s (SF General) financial picture is concerning.

Despite ceasing writing new Fire business last May and implementing rate increases in several product lines this year, the financial strength of SF General continues to deteriorate.

Although there haven’t been significant California wildfire losses for several years, large underwriting losses and growing risk exposure has resulted in surplus of less than 50 cents for every dollar of risk we face today. SF General’s financial strength is less than a quarter of what it was in 2016. Even factoring in the May 2023 action and the approved rate increase, the financial picture for SF General is projected to get worse in 2024.

As a result, we must take some difficult but necessary underwriting actions that will unfortunately impact some of our existing customers.

As shared during today’s call, State Farm General will take the following actions to further reduce our exposure in California:

• Non-renew approximately 30,000 homeowners, rental dwelling and other property insurance policies (residential community association and business owners) beginning July 3, 2024.
• Withdraw from offering commercial apartment policies, which will result in the non-renewal of all those policies (approximately 42,000) beginning Aug. 20, 2024.

Additionally, State Farm General will also:

• Remove commercial earthquake coverage for all remaining Business Lines Fire policies with the endorsement, excluding farm/ranch.
• Non-renew business owners policies for tobacco product stores and telephone/cell phone stores & installation.

Combined, these actions represent just over 2% of Fire policies in the state.

We realize this will impact many of you and the relationships you have built. This decision was not made lightly and is necessary to improve the affiliate’s financial strength to ensure we can help more people in more ways, forever. We’ll continually evaluate our approach based on changing market conditions.

 

Action requested

Please review the following resources in preparation for customer questions:

·      Update on California on statefarm.com®

·      3/20/2024 letter from State Farm General to the California Department of Insurance

·      State Farm General underwriting actions on Agency Hub News

·      *Key Messages and Customer FAQ on the Western Market Area site’s California page. The Key Messages include details about the agent policy listings that will be available in the Campaigns tab of ECRM beginning March 20.

Your market area leadership is also available as a resource. As always, please redirect any media inquiries to Sevag Sarkissian.

Message points
The following are approved messages agents can share verbally with customers:

• State Farm General Insurance Company is taking necessary actions to improve its financial strength related to California:
• State Farm General will non-renew approximately 30,000 homeowners, rental dwelling and other property insurance policies (residential community association and business owners) beginning July 3, 2024.
• Additionally, the company will withdraw from offering commercial apartment policies with the non-renewal of all of those approximately 42,000 policies beginning Aug. 20, 2024. (This is insurance for apartment owners, not renters insurance.)
• The non-renewal process will take over a year to complete. (through July 2, 2025, for impacted homeowners, rental dwelling, residential community association and business owners policies and until Aug. 19, 2025, for apartment policies)
• State Farm independent contractor agents licensed and authorized in California will continue to service impacted policies up until their last date of coverage.
• State Farm agents will also continue to service policies not impacted by these decisions.
• We’re mindful of the impact to customers and will continue to work constructively with the California Department of Insurance, Governor’s Office and policymakers to address needed market reforms and help build market capacity in California.
• This decision is unique to California and the challenges there.

 

Thank you again for your ongoing commitment as we continue to address our challenges in California. 

For more information

• For questions about ECRM policy listings, contact Agency Sales Resources (ASR).

• For questions about the philosophy of these underwriting actions and agent impacts, contact your sales leader.

 

C:

Senior Executive Council; Sales Executive Office; Western Market Area Executive Team; P&C Underwriting/Billing Strategy, Actuarial & Modeling Executive; Angela Martin; Adam Swope; Jeff Clinch; Ken Doss; Sales Leaders of agents licensed in California; WMA Agency Administration Leaders and AFS Function Manager/Managers; ECC PLCC/BLRC and Billing Directors; Greg Reynolds; Nathan Miller; Tisha Strand; Debra Billings; Sheri Kurkowski; Laura Campbell; Marty Wietfeldt; Melinda Clark; Laura Triplett; Anne Bennett; Lynn Whitlow; Chris Stucky; WMA Executive Assistants

 

FOR INTERNAL STATE FARM USE ONLY

Contains information that may not be disclosed outside State Farm without authorization

 

IMPORTANT NOTICE:  

 

This email, including any attachments or subsequent replies or forwards, (a) may include confidential, proprietary or other protected information; (b) is sent based upon a reasonable expectation of privacy; and (c) is not intended for unauthorized persons. If you are not the intended recipient, then you must not use, disclose or disseminate the information.  In addition, please immediately notify the sender and then permanently delete the message and any attachments, replies or forwards, including any copies or portions thereof. Any unauthorized review, use, disclosure or distribution of this email is prohibited and may be a violation of law or regulation.  It is the responsibility of the recipient to take steps to protect against viruses and ensure that this email (and any attachments hereto) does not adversely affect any computer system into which it is received or opened.

 

31518 West Nine Condo

31518 WEST NINE DRIVE Laguna Niguel CA 92677

Built 1972 everything but the floor is original.

Building flooded twice once in 11/2022 and again in 2023.

Roof leaked for sixteen months in the unit and twenty months in the garage.

The garage still leaks today although the HOA was notified in 2021.

Unit below flooded twice and also was never cleaned up or fixed.

Ceiling of 31518 was wet for 15 months while nothing was done.

Garage filled from roof leak with two inches of water, still not repaired.

Ceiling light in kitchen saturated with water sags and has electrical short, Utopia

notified and did not repair. Utopia sent out several inspectors but no repairs. HOA

sent five persons to bid the job.

When I moved in there was no working heat and most of the electrical outlets not operational.

Utopia put in new panel and replaced four receptacles but not the majority for unknown reason.

Utopia left the hole in the wall the while I complained and did nothing.

Skylight has asbestos and leaked water see photo, kitchen leaked, hallway and bath leaked.

Kitchen sink leaks since move in.

Bath sink leaks since move in.

Show bottom surround is cracked as the fiberglass is 1972 and worn out since move in. You cannot stand barefoot in that shower without getting sharp particles in your feet.

Shower head is rusted since move in.

Drain never was attached  since move in.

Tub drain plug doesn't seal since move in

Ceilings in baths and under sinks moldy since move in.

Ceiling fans moldy since move in. 

both bath sinks the plunger to hold water doesn't seal.

Slider doors difficult to open as galvanized track end of life. Screens never shut. Master bedroom 

slider does not shut 100% as the frame is bent since move in. 

Front door jam dry rot. Front door jam moldy. Front door a fire hazard as you can get stuck inside and unable to open. I put blue painters tape over the turn lock as to remind not to lock or peril, since move in.

Garage has leaked three major messy floods, walls are wet on move out 3/15/2024. Garage roof never repaired for 20 months.

Garage door is fire hazard, there is no emergency opening device when power goes down. Power often off in garage structures due to neighbors pirating electric power.

No power in unit on move in. No heat in unit on move in. Landlord / Utopia gave 10 days grace but it took 85 days to install heater in December.  New panel put in but electrician cut this hole and Utopia refused to repair their own contractor's work.

Kitchen left cleaner than when I moved in. The grout is end of life with gaps. 

Garage leak right side

garage leak left side

garage leak left side 

garage walls wet on move out 3/15/2024

garage upper the plaster crumbling from rain

garage was left clean on move out 3/15 I was VERY Difficult to clean up the moldy mess

Screen in garage is Dennis'

stove 70% operational at move in now rusted

Floor in good condition. Tenant had six five gallon buckets in the condo all the time to catch water pouring in

Front door frame dry rot and termite damage

kitchen sink the enamel is gone. On move in the sink could not be cleaned to be white. The sink porcelain is worn out and rusted.

master shower drain since move in unattached

kitchen left clean but moldy this is toxic mold

leaks caused dry wall tape to lift in ceiling

lead paint peeling as Utopia painted acrylic cheap paint over enamel and it chips since move in. Not the smoke detector was damaged by the leaks and cannot operate. Utopia was notified 90+ times that the ceiling was pouring in rain and damaging tenant's contents and the condo unit. Utopia ignored complaints.

This is the kitchen burner of a condo that rents at market rate. Disgraceful.

bottom front door is a hazard. The jam is dry rot but Utopia used puddy to patch the door and hide the mold. The bottom door sticks and cannot open

Bathroom left clean at move out

For lease/ rent

Unit has mold and deferred maintenance 

Niguel Hills Villas

Utopia Management Company 

GSE's Going Independent?

Fannie and Freddie take a walk alone?

GSE's Still Under Conservatorship

• FHFA authority: The Federal Housing Finance Agency (FHFA) has broad authority over the GSEs, including the power to place them in receivership. Receivership allows the FHFA to restructure the capital stack, potentially wiping out the value of junior preferred shares and common stock. This gives the FHFA a strong hand in negotiations.

However, there are some nuances to consider:

• Repurchase option: The GSEs might use proceeds from selling common stock to repurchase outstanding junior preferred shares. In this scenario, negotiation might be around the price offered for the repurchase.
• Signaling effect: While they might not have significant power to influence the overall structure, junior preferred shareholders could still influence the terms through a coordinated effort. This could signal to the FHFA or the government the potential for legal challenges or negative publicity.

Overall, the negotiating power of junior preferred equity in a Fannie Mae and Freddie Mac capital stack or restructuring is limited due to their subordinated position, reliance on government backing, and the authority of the FHFA. However, there might be some room for negotiation on specific aspects like repurchase price or influencing the process through collective action.