Enact Holdings, Inc. · NASDAQ:ACT
Enact — Investor Presentation (December 2019)
51 slides from Enact's investor presentation, December 2019
Slide 1: Introduction to the Secondary Market: The Basics
Introduction to the Secondary Market: The Basics December 2019 ©2019 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. These lender
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 Genworth Mortgage Insurance 3
Slide 5: Expected Return vs Risk
Expected Return Investment- Junk Grade High Bonds Corporate ● Privately Bonds ● Issued Preferred MBS● GSE Stock Asset-Backed Money- MBS ● Securities Market GSE ● Securities Debt ● T-bills Low Difficult Risk High Secondary Market 4
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 Genworth Mortgage Insurance 5
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 the
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 overall in
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 down,
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 Investors • Credit Unions • Purchase Existing Loans From Originators Servicers • Assume Rights to Paym
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 over Par (100%)
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. Thi
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: 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. – P
Slide 15: 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 16: “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 Genworth Mortgage Insurance 15
Slide 17: 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 Corpora
Slide 18: 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, for
Slide 19: Secondary Market Genworth Mortgage Insurance
Secondary Market Genworth Mortgage Insurance 18
Slide 20: 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 Genworth Mortgage Insurance 19
Slide 21: 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 22: 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 Genworth Mortgage Insurance 21
Slide 23: 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 & GSE Aggregator Credit *Bank Default Risk Bank Bank **Originating **Originating Underwriting/ Entity Entity Misrepresen- tation Risk *With certain FHLB programs the origina
Slide 24: 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 Genworth Mortgage In
Slide 25: 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 Genworth Mortgage Insurance 24
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 Genworth Mortgage Insurance 25
Slide 27: 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 Portfolios
Slide 28: Origination ($B): Largest Purchase Origination Market Since '06
LARGEST PURCHASE ORIGINATION MARKET SINCE ‘06 4,500 Refi Origination Purchase Origination 4,000 3,500 3,000 Origination ($B) 2,500 2,898 1,575 1,460 1,511 2,000 1,870 1,262 1,010 720 1,500 1,317 660 1,520 480 1,138 822 1,274 763 1,095 1,000 978 517 1,545 1,520 1,409 1,168 1,170 1,260 1,047 1,060 1,1
Slide 29: Macro and Mortgage Market Outlook
Macro and Mortgage Market Outlook Mortgage Market Drivers Key Points 7/1/2019 2017 2018 2019 2020 2021 2022-24 Housing 30Y FRM 4.0% 4.5% 4.0% 4.1% 4.2% 4.4% • Home price gains slows to <4%, 10Y TSY 2.3% 2.9% 2.3% 2.4% 2.5% 2.7% Conforming loan limit growth HPA 6.6% 6.7% 4.7% 3.5% 3.5% 3.5% continues
Slide 30: Share of Origination by Channel
Share of Origination by Channel Mortgage Origination by Channel Retail Share Correspondent Share Broker Share 100% 90% 27% 34% 31% 34% 35% 38% 38% 80% 44% 45% 53% 55% 57% 58% 57% 58% 56% 56% 56% 70% 60% 61% Market Share 60% 38% 33% 50% 31% 33% 34% 31% 33% 40% 35% 39% 30% 27% 34% 28% 33% 33% 33% 32%
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 payments. An
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 matu
Slide 35: 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 36: 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 37: 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 38: Mortgage Securities First Quarter 2019
Mortgage Securities First Quarter 2019 http://www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2019/q12019.pdf Secondary Market Genworth Mortgage Insurance 37
Slide 39: Fannie Mae
Fannie Mae Secondary Market 38
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 Genworth Mortgage Insurance 39
Slide 41: Secondary Market Genworth Mortgage Insurance
Secondary Market Genworth Mortgage Insurance 40
Slide 42: 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 Through securities Which sells Sells whole loans dealers or FHLMC To Freddie Mac Participation Cert’s or participations trading desk Mortgage Lender Thro
Slide 43: Stay Informed!
Stay Informed! miblog.genworth.com U.S. Economic and Housing Update - May 2019 42
Slide 44: Genworth Rate Express
Genworth Rate Express® mi.genworth.com Presentation Title Insert Legal Copy 43
Slide 45: Genworth Underwriting Guidelines
Genworth Underwriting Guidelines mi.genworth.com Presentation Title Insert Legal Copy 44
Slide 46: LOS Connections
LOS Connections mi.genworth.com Presentation Title Insert Legal Copy 45
Slide 47: Training Tools and Information
Training Tools and Information mi.genworth.com Presentation Title Insert Legal Copy 46
Slide 48: Training Tools and Information
Training Tools and Information mi.genworth.com Presentation Title Insert Legal Copy 47
Slide 49: Additional MI Site Information
Additional MI Site Information mi.genworth.com Presentation Title Insert Legal Copy 48
Slide 50: Your Genworth Resources
Your Genworth Resources ➢ ActionCenter®: 800 444.5664 ➢ Your Local Genworth Regional Underwriter ➢ Your Genworth Sales Representative Presentation Title Insert Legal Copy 49
Slide 51: 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
Enact Holdings — Investor Presentation (December 2019) on 6ix